OREANDA-NEWS. October 13, 2015.  Fitch Ratings has downgraded Deco 15 - Pan Europe 6 Ltd. (DECO 15)'s class A3 notes and affirmed the other tranches as follows:

EUR18.0m class A3 (XS0307400506) downgraded to 'Asf' from 'AAsf'; Outlook Negative
EUR52.0m class B (XS0307401140) affirmed at 'BBBsf'; Outlook Stable
EUR53.5m class C (XS0307405133) affirmed at 'BBsf'; Outlook Stable
EUR41.3m class D (XS0307405729) affirmed at 'CCCsf'; Recovery Estimate (RE) 75%
EUR15.7m class E (XS0307406453) affirmed at 'CCsf'; RE0%

The transaction was originally the securitisation of 10 commercial mortgage loans secured on assets located in Germany, Austria and Switzerland. In July 2015, three loans remained, all in special servicing after defaulting at their maturities. All surplus income is being trapped and used for repayment, capital expenditure and marketing for sale of the underlying collateral (predominantly retail warehouses in Germany).

KEY RATING DRIVERS
Following the repayment of the last performing loan (EUR75.5m Freiburg), all remaining loans are in special servicing. Fitch expects the three senior tranches to be repaid. However, while still remote, the growing risk that either of the larger loans remains unresolved at bond maturity in April 2018 means note repayment is more exposed to the recovery rate on the other loans. This risk is no longer commensurate with a rating above 'Asf', reflected in the downgrade of the class A3 notes.

The Negative Outlook signals that this risk will grow over time unless the larger loans are resolved. In Fitch's view the class B and C notes' ratings adequately reflect this risk. The class D and E notes' ratings reflect Fitch's expectations of ultimate losses.

Since the last rating action in October 2014, the EUR75.5m Freiburg loan repaid in full in line with Fitch's expectations. The principal proceeds, combined with payments from the EUR134.8m Mansford OBI Large loan, were allocated to the notes sequentially, repaying the entire class A2 notes and the majority of the class A3 notes as of the July 2015 interest payment date (IPD). The improved credit enhancement/advance rates contributed to the affirmations.

There has also been an attempt by the controlling class to replace the special servicer (Hatfield Philips International). This has been unsuccessful so far, although a recent court ruling has been appealed by the controlling class representative.

Mansford OBI Large defaulted at its scheduled maturity in July 2014 and entered special servicing. A standstill agreement was signed and following commencement of marketing, initial bids for the collateral have been received. The special servicer stated that final bids and subsequent sale are expected in late 2015. Meanwhile, a EUR1.1m reserve covers property expenses and regular principal payments (EUR7.1m over the past year).

The underlying 10 retail warehouses located in Berlin and various mid-sized German towns are fully let, with German DIY chain OBI accounting for 98% of the rent. A collateral revaluation in September 2014 confirmed that no equity remains. Fitch estimated the effective loan-to-value (LTV) in excess of 100% in its 2014 review and continues to expect a significant loss.

EUR68.6m Main has been in special servicing since its scheduled maturity in 2011. A hold strategy is in place, aimed at extending existing leases and reletting of vacant space prior to sales. The disposal strategy envisages creating a more homogeneous portfolio by selling off individual assets with development opportunities. The collateral comprises 31 retail warehouses and one office property. The sales process is scheduled to commence this year, with one asset sale reportedly finalised by the October IPD.

Since entering special servicing, EUR13.3m of surplus income was used to amortise the loan. However, over the last three collection periods, the reserve has been built up instead (to EUR2.2m in July 2015), leaving the loan balance unchanged since October 2014. Given the high LTV (138.4% at the July IPD), Fitch expects a significant loss.

The smallest loan, EUR11.8m Plus Retail, has been in special servicing since 2012. After negotiations regarding a consensual sale failed, the special servicer filed for insolvency in relation to the borrowers estates. Preliminary insolvency proceedings commenced and an administrator has been appointed. The loan missed its interest payment in July 2015 as no funds were released (not uncommon for insolvent loans). A EUR0.04m liquidity drawing was made and is expected to be repaid prior to principal once the loan workout is completed.

Surplus income continues to be trapped, with EUR1.2m standing by for reletting expenses. The collateral comprises five retail warehouses, anchored by German retailer PLUS (accounting for some 60% of the rent). The assets are fully let to 16 tenants on leases expiring on average in 4.9 years. With an LTV of 137.8%, Fitch expects a significant loss.

RATING SENSITIVITIES
Should the class A3 notes remain outstanding for more than 12 months (e.g. in the event of the Mansford OBI Large sale falling through), a downgrade to 'BBBsf' would likely occur, as reflected by the Negative Outlook on this tranche.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the
performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

SOURCES OF INFORMATION
The sources of information used to assess these ratings were the issuer, servicer, and periodic cash management and servicer reports.