Following a prior downgrade action by Standard & Poor's on the rating of Hypothekenbank subsidiary Wuerttembergische Hypothekenbank's senior unsecured paper to A-minus, the Class C notes of WuerttHyp 2001-1 CMBS were recently downgraded to A-minus from A.

According to the S&P report on the downgrade, the Wuertt-Hyp 2001-1 transaction employs reference credit-linked notes that are issued directly by WuerttHyp with the payment of amounts due based on the performance of the reference pool originated and serviced by WuerttHyp. Further, WuerttHyp's senior unsecured rating supports the rating to the class C+ and D+ notes and consequently, the rating on the class C+ notes was lowered to match WuerttHyp's A-' long-term credit and senior unsecured debt rating.

The rating action does not reflect upon the performance of the underlying pool and instead reflects the issuer's obligation to pay, said one analyst. This action highlights a more cautious approach to tranches that are directly linked to the issuer, as is the case in a number of German issues. Yet, the potential for future downgrades remains fairly limited, particularly because of the "complexity" of the German synthetic structure, said analysts at Dresdner Kleinwort Wasserstein. "Direct CLN structures in particular require careful analysis, as in some deals the collateral has been pledged, whereas in others the notes are linked directly to the rating of the issuer," reported Dresdner.

Case in point, the class C tranches of WuerttHyp's RMBS 2000-1 were initially expected to suffer a similar fate as the CMBS notes but the RMBS notes, it turns out, are not directly linked to the issuer's credit rating. Instead, the notes are supported by the bank's public sector Phandbriefe and will not be affected.

Despite the problematic environment of the German banking system, it's unlikely that a German bank rating would go below a triple-A and many of these tranches are usually rated two notches below the bank's rating in an effort to deter such a situation, said the analyst. "It's not very dramatic, but if a tranche is rated at the same level as the issuing bank, investors need to consider that there is a certain risk affiliated with this," said one analyst.

Nonetheless, the threat exists for a number of issues. Delineated last week in a report issued by Dresdner are German issues that possibly face downgrades. According to analysts at the bank, the Class B, C and D notes of Geuldilux 1999-2 are expected to be downgraded by S&P because of the link to Hypovereinsbank's recent downgraded rating.

Additionally, the triple-A rated notes of CAST 1999-1 and 2000-1; Europa One and Two; Eurohypo 2000-1 and 2001-1 and Globe-R 2000-1 maintain a credit negative watch from S&P because of their direct link to Eurohypo and Rheinhyp public sector phandbriefe, which are also on credit negative watch.

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