Moody's Investors Service has removed its ratings from the senior tranches of Provide Domicile 2003-1, Deutsche Postbank AG's German RMBS. The withdrawal of the ratings is a result of Postbank exercising a regulatory call because of the implementation of Basel II (ASR, 2/26/07).
The class D notes will partially remain outstanding as the principal value of overdue reference loans exceeds the threshold amount, leaving 8.03 million ($10.5 million) outstanding from a total of 10.7 million Class D notes outstanding.
Postbank said it exercised its option to redeem the notes early following the occurrence of a "regulatory event" or its implementation of the Basel II capital accord provision, which resulted in a less favorable capital adequacy treatment with respect to the assets securitized. The employment of the call option means it's likely that the market will continue to see additional early redemptions from transactions completed under the Provide and Promise platforms.
According to the transaction documents, the class D notes will be repaid as the outstanding overdue reference claims will amortize or, in the case of enforced reference claims, recoveries will be collected. Postbank almost managed to call the deal without a deferred redemption. However, in the latest reporting schedule, overdue reference claims stood at 23.6 million - including 16.1 million of credit events - and were thereby in excess of the outstanding threshold amount of 15.5 million junior swap in the transaction. This is why the deferred redemption has been exercised for the deal's class D notes.
Employing the call option makes valuation of the outstanding notes complex, explained Societe Generale analysts in a report. "We believe that junior tranches may be able to trade at a premium to par given generous note margins, if the notes essentially reference overdue claims," they said."However, we would assume a conservative prepayment profile since the much reduced loan pool will have a lumpier redemption profile."
Moody's said that the outstanding class D notes might also be redeemed in full on any future interest payment date in which case Postbank may assume that all losses will be covered by the first loss and could redeem the remaining notes at some point in the future.
According to SocGen, Domicile's remaining overdue pool of loans had a 66% weighted average LTV, which suggests that only minimal risk remains within the pool. "To date only 45,194 of losses have been reported, providing us with further comfort - the transaction only protects Postbank from principal losses and not accrued interest," SocGen analysts said.
In most cases, redeeming the deals will be pretty straightforward. In the event that overdue reference claims are greater than the first loss coverage, only classes of notes that are not affected by the overdue reference claims can be redeemed in full. Classes that are affected will be subject to deferred redemption. Typically, this affects only the bottom notes in the capital structure and these are the notes that then remain partially outstanding.
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