The upcoming marriage of German banks Eurohypo AG and Rheinhyp AG has triggered a series of credit watch actions. As October came to a close, Standard & Poor's announced that it would place the banks' respective senior secured Pfandbriefe notes on watch with negative implications pending finalized details of the merger.

Both the triple-A tranches of Eurohypo AG's and Rheinhyp AG's senior- secured public sector (ffentliche) Pfandbriefe and Eurohypo's senior-secured mortgage (Hypotheken-) Pfandbriefe are threatened. Now the ratings group is turning its attention to the banks' securitization assets and announced last week that the triple-A ratings for Eurohypo 2000-1, Eurohypo 2001-1, Europa One Ltd., Europa Two Ltd., Globe-R-2000-1, CAST 1999-1, and CAST 2000-1 would be the next to join the credit watch list.

And logically so, said analysts with the S&P structured finance team. The late October credit watch action taken against the Pfandbriefe notes potentially jeopardizes the credit standing of the banks' existing securitizations because the triple-A-rated tranches rely on the Pfandbriefe as collateral for its rating. Eurohypo's Pfandbriefe provides the supporting rating to the triple-A tranches in: Eurohypo 2000-1, Eurohypo 2001-1, Globe-R-2000-1, CAST 1999-1 and CAST 2000-1. The Rheinhyp Pfandbriefe supports Europa One Ltd and Europa Two Ltd. The securitization tranches that are affected by the Eurohypo Pfandbriefe rating action include: the Eurohypo 2000-1 Credit-Linked Notes EURO500 million (U.S. $447.60 million), class A tranche, Eurohypo 2001-1 GBP147 million (U.S.$215 million) floating-rate amortizing credit-linked notes and EURO72 million (U.S.$64 million) floating-rate amortizing credit-linked notes; EURO1.3 billion (U.S.$1.13 billion) floating-rate amortizing credit-linked notes of Europa One Ltd., which includes the Class A1 to A3 tranches and the Class M tranche; the class A1, A2 and M tranches of Europa Two Ltd, which totals EURO1.54 billion (U.S.$1.37 billion).

The tranches under the Rheinhyp Pfandbriefe umbrella include: EURO280 million (U.S.$250 million) credit-linked notes of the Globe-R-2000-1 transaction, under which the class A1 to A3 notes are affected; the class A1 and A2 notes of CAST 1999-1 that total EURO391 million (U.S.$350 million); and three tranches, class A1 to A3 of CAST 2000-1 which amount to EURO339.9 million (U.S.$303 million).

"It's important to remember that while the banks are in advanced negotiations, there is still some uncertainty that remains," said an analyst on S&P's structured finance team. "There are still some aspects of the merger that have yet to emerge, and that amounts to uncertainties.

"We expects to resolve the CreditWatch placement on the triple-A-rated notes when the merger of Eurohypo and Rheinhyp into Deutsche Hyp is considered irreversible." What this amounts to is that ratings will need to be assigned to Deutsche Hyp's Pfandbriefe, which are currently not rated by S&P. To be sure, the recent rating actions do not as much reflect S&P's concerns for the Pfandbriefe issue as they merely reflect the agency's analytical approach to the structure, which revolves primarily on an "ongoing surveillance of the cover pools and the underlying cash flows."

"We don't know the pools of all the banks," the analyst added. "We don't know the mortgage and public-sector pools but just because it is on credit watch negative is not to say that there is no possibility for an uplift later."

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