Commerzbank last week launched the largest ever mortgage-backed transaction to come out of Germany. Called Commerzbank AG, Residence 2000-1, the E2.5 billion ($2.35 billion) synthetic deal is backed by a pool of residential mortgages originated and serviced by Commerzbank. The bank also arranged and managed the transaction.

The underlying pool comprises around 41,500 loans with a value of just over E2.5 billion, with 68% being first ranking mortgages. The weighted average loan-to-value ratio for the collateral is 79%, and there is a fairly even geographical spread throughout Germany. Because the notes are credit linked to the underlying portfolio, the size of the deal was brought up to E2.5 billion.

Floating rate public sector pfandbriefe issued by Essenhyp provides credit enhancement for the senior notes. The pfandbriefe has terms and payment schedules that mirror that for the triple-A notes and in the case of default, the pfandbriefe will be sold to satisfy the bondholders. The subordinated tranches are linked to Commerzbank's unsecured rating, so if that goes down, the notes' rating will fall accordingly.

The deal was split into five tranches, one of which was an unrated E40 million tranche and will be held by the bank. The two senior tranches - the 0.98-year average life A1 E200 million notes and 7.1-year average life E650 million A2 tranche - were rated AAA by Standard & Poor's and Fitch . The E87.5 million B notes were rated A by both agencies and carry 15-year average lives, as do the triple-B rated E22.5 million C notes.

The A1 tranche priced at 20 basis points over three-month Euribor, while the A2 notes priced at 45 over. The spread on the B notes was 95 over and the C tranche pays out 170 over.

Almost 30% of the A1 notes were sold into France, and there was also strong interest from investors in Germany, Italy and Belgium. German investors purchased almost half of the A2 tranche, and the bonds were also placed with U.K., Belgium and Spanish investors.

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