The Titan Europe 2006-5 transaction posted a notice published yesterday indicating that the Quartier 206 shopping center that secures the defaulted loan with the same name was placed into "public administration".

According to the notice, the special servicer and the borrower held restructuring negotiations until May 2011 before the borrower offered to acquire or repay the loan in full for a consideration of €90 million (discounted pay-off or DPO).

The special servicer decided that this offer was unacceptable and applied to the court for the commencement of public administration of the mortgaged property.

Consequently, the court placed the property into public administration. The loan has a balance of € 114.8 million, and accounts for 18.7% f the Titan Europe 2006-5 CMBS portfolio, according to Barclays Capital analysts. It has been in payment default since April 2010.

Since then, the unpaid interest on the whole loan accumulated to €8.9 million as of April 2011; at issuer level, the liquidity facility was drawn to cover the senior loan interest shortfall, but special servicing costs resulted in interest deferrals on the junior classes. The loan is secured by a shopping mall in the prime retail area of Berlin, Germany.  

"We think that the term 'public administration' used in the investor notice refers to compulsory administration, one of the legal enforcement routes the beneficiary of a mortgage can take in Germany," Barclays analysts said.

A compulsory administration is similar to the appointment of a receiver in England and Wales. However, the court administers the appointment. The administrator administers the property of behalf of the creditors. Under compulsory administration, after deduction of certain costs, the creditors receive ongoing payments of the income generated by the property, while the borrower remains the legal owner of the property.

Mezzanine and junior noteholders are set to benefit from the proceeding more than senior noteholders, said Barclays analysts because under the €90 million DPO, the proceeds would have been first used to pay costs, issuer-level swap-termination costs and accrued interest, which would have left approximately €65 million as principal recoveries that would have been paid to class A1.

According to Barclays, this would mean that the Classes E and F would have been fully "written off" and class D nearly fully "written off."

"These classes gain most from the compulsory administration of the Quartier 2006 shopping centre as allocation of losses will be delayed and optionality in terms of principal recovery maintained," analysts said. "For class D noteholders especially, but also for class C noteholders, the advantages of not selling the property or the loan at a loss also include the potential for ongoing note interest payments and potentially even the repayment of previous interest deferrals."

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