The extensive flooding that hit Central Europe threatened to wash away not only century-old monuments, but more recent symbols of European innovation as well. Among these, securitizations may shoulder their own share of the devastation, illustrating the damage that extends well beyond the concrete.

Floodwaters affected certain regions in Germany, Austria, The Czech Republic and Slovakia. Allianz estimates that the cost of the damage across these regions will be E15 billion, and the company expects its gross losses to total E815million with at least E580 million concentrated in Germany. Munich Re has pitched in estimates that put its losses in Germany somewhere between E5billion and E10billion.

And while Germany constitutes a small share of the European RMBS market - with E6.5billion issued to date - it has been the most active among the affected Central European countries.

According to Dresdner Kleinwort Wasserstein, the bulk of ABS issuance backed by German assets is made up of RMBS and CLOs. "RMBS are the most obvious victims of the floods given that some houses, which act as collateral for the mortgage loans in the affected regions, have either been destroyed or rendered uninhabitable," reported the bank.

Fitch investigation

Because of the extent of the damage caused by the flooding, Fitch Ratings has also launched an early attempt to assess the impact the flooding may have on German RMBS the agency has rated.

The regions of Saxony and Saxony-Anhalt in Eastern Germany sustained the most damage. In order to determine what the potential exposure of the German loan portfolios to RMBS transactions, Fitch employed a postcode analysis for collateral located within a 10-kilometer radius of the river Elbe. The transactions where the percentage exceeded 1.5% will be investigated, including the following: Haus 98, Bauhaus, Eurohypo, WuerttHyp 2001-1, NurenbergHyp 2000-1, HVB Real Estate 2001-1, Provide A, Provide Home 2001-1, Provide Gems 2002-1, and Provide Comfort 2002-1.

"The analysis will center on how the lenders are planning to treat flood-stricken borrowers," explained Stuart Jennings at Fitch. "There is pressure on the banks to write off loans where the borrower has suffered such hardship - pressure which banks are resisting. We need to see how this debate will play out."

He added that the agency is also investigating such concerns as whether the borrowers are being given payment holidays, and is legal action to enforce being delayed. Fitch will also investigate the extent of the collateral damage in the regions affected and the percentage of homes that have been damaged.

According to Dresdner, figures in 2000 showed that the region of Saxony has 4.43 million residents, and Saxony-Anhalt 2.62 million. The larger cities in these regions like Leipzig, Halle and Chemintz did not sustain any flood damage, however, and therefore it's likely that the number of people affected by the floods will be less than would initially be apparent - a context within which the exposure of German transactions must be viewed.

Of those transactions targeted by Fitch, none have more than 3.5% exposure to the 10-kilometer radius investigated by the agency. "At the end of the day, although the flooding was extensive, no deal appears to be affected by more than 3% exposure, and with combined insurance coverage and government relief, it is possible that there will be no ratings actions, but we would obviously need to complete our investigation first," said Jennings.

He added that Fitch did not take into account such unpredictable risks in its initial analysis. In the ongoing investigation, he stresses that insurance coverage will play a key role. The agency intends to clarify insurance requirements on origination at each lender, as well as its assessment of the degree to which borrowers are covered. According to initial findings, Fitch found that there is more insurance coverage in the East than in the West.

The agency also plans to assess proposed government relief assistance. At present, the government is working on a E10 billion relief package, and the EU has allocated E1.2 billion in relief funds to Germany.

CLOs also in spotlight

In addition to the effect the flooding may have on RMBS, Dresdner also highlights the potential exposure of CLO structures to the damage - specifically those wherein the underlying collateral is comprised of loans to small- and medium-sized enterprises (SMEs).

In addition to the direct effects the damage to property and infrastructure may have on CLO structures, the possibility of a consequential rise in unemployment and decline in consumer demand poses a threat as well. The German Finance Ministry estimated that in Saxony, around 11,000 SMEs might have been impacted.

The risk for CLOs is the borrowers' failure to pay. The German Finance Minister has stated, however, that he does not expect to see any significant rise in insolvencies as a result of the floods. Along with state aid, borrowers will benefit from a tax relief and a relaxation of the insolvency procedure. According to Dresdner, it is still not clear as to whether this will be sufficient, but the bank said it does not anticipate any major impact on the transactions.

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