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Capital Markets

CMBS: Leisure assets prove hard work

With Hoteloc still ringing in the market’s ears, Deutsche Bank’s conduit trips up on its pub valuations.

In mid-April, Standard & Poor’s announced that it had placed the D and E tranches of Deutsche Bank’s DECO Series 2005-UK Conduit 1 deal on creditwatch negative because of problems with the valuations of some of the properties backing the deal. A quick glance at the assets reveals that 25% of the initial pool was made up of hotel and leisure-related properties – which should have been enough to ring alarm bells given that sector’s track record in the securitization market. But the problem this time is actually pubs – a business that has been happily linked to ABS since the Guy Hands heyday of the early 1990s.

The problems centre on three pubs in Scotland that were financed via a £2.1 million ($4.2 million) loan that has been in special servicing since December. It appears that the initial valuations in the deal were pretty aggressive, and the vacant possession valuation of the properties is now 203% LTV (two of the tenants are in administration and the third is bankrupt). The fact that this deal has run into trouble is slightly ironic as when it was launched it was hailed as bringing more granular, diversified US-style conduit CMBS to Europe: the pool comprises 23 loans and 45 properties.

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