Access Point Financial, made its debut in the securitization market with what is arguably a new asset class: loans used to finance hotel renovations. But the deal senior notes issued Access Point Funding I 2015-A, in line with similarly rated, esoteric deals.
The issuer paid swaps plus 175 basis points on $145 million of class A notes, yielding 2.62%, according to a person familiar with the deal.
“The reason they did a securitization was to diversify funding sources,” said the source. “Access Point has a number of bank lenders that they have been using but the securitization gave them a higher advance rate with a lower all in cost, which is a trend that has been happening in the securitization market.”
Access Point Funding I 2015-A offered a total of $183 million of securities, backed by the loans made to franchisees of major hotel brands and owners of independent boutique hotels. The loans are secured by furniture, fixtures, and equipment (FFE) upgrades franchisees are required to make. Under contract, franchisees are obligated to change aesthetic appearance and/or meet other requirements as dictated under franchise agreements. The loans are on average between $1 million and $1.5 million. These are mostly roadside hotels that often target the business traveler.
It is the first time that these kinds of loans have been securitized. Guggenheim Securities is the lead arranger.
The deal is also a first for Morningstar: it is the first time the credit rating agency has been hired to rate a public asset-backed deal.
Morningstar is rating the bonds at least one notch higher than Standard & Poor’s. The class A notes that have a weighted average life of 1.6-years are rated A+/ A; the 4.81-year, class B notes are rated BBB+’/ BBB’ and the 5.16-year, class C notes are rated BB+’/ BB’. The class A notes are structured with 27.9% subordination, the class B notes are structured with 22.95% subordination and the class C notes are structured with 14.65% subordination.
The ratings differential is widest on the most subordinate tranche, the 5.57-year, class D notes, which Morningstar plans to rate three notches higher than S&P, at BB’ versus B’. These notes benefit from 8.80% subordination.
Morningstar’s ABS team has been around since April 2014. Violet Diamant was hired as managing director of ABS ratings and research team in April and was joined by David Nathanson in September 2014. This year Diana Lande and Rohit Bharill joined the ABS ratings team. Diamant said that Morningstar is looking to hire one more senior analyst that covers transport, energy and other emerging asset classes.
In the year the team has been in operation, only ratings on privately placed transaction, for which presale report are unavailable, have been issued. The Access Point transaction is the first public deal the rating agency has rated.
Nathanson said that although the Access Point transaction looked similar to a small business loan securitization, “it’s a very specialized collateral. The recovery analysis is very different and duration of collateral is also very different from small business loans.”
The loans, for example, benefit from full recourse to owners of each hotel property; this feature is uncommon in small business loan securitizations. Each underlying loan is guaranteed by each partner owning more than 10% of the related hotel property (each, a guarantor). Many of these owners have a large portfolio of hotels and other liquid assets.
Another plus is that the loans are structured to encourage prepayment before the end of a one-to-two-year periods during which the borrower pays only interest; this is followed by a seven- to eight-year period during with the loan amortizes. Prepayment reduces default risk by shortening the life of the underlying loan. As of January 2015, 22% of loans originated by APF had prepaid, and the weighted average life of those prepaid loans was 16 months. Morningstar expects that the prepayments will continue, barring a significant market or economic dislocation.
“The IO period is attractive to underlying obligors because it helps minimize cash needs during renovations, when room rental income is likely to dip,” stated the Morningstar analysts in the presale. “The hyperamortization period incentivizes a refinancing by more permanent capital providers.”
Once the interest-only period expires, franchisees generally opt to move out of the specialty finance loan and into regional bank funding, explained one source familiar with the deal, “Banks won’t typically finance renovations, they show up when the project is done and generally do the refinance”.
Diamant added that the transaction also benefits from Access Point's strong track record. Only one loan out of more than 300 loans originated by APF has defaulted since the company started extending FFE loans in late 2011. Although t historical data available is limited, the CEO and founder, Jon Wright, has extensive experience with underwriting these loans.
Wright started working in the business when he was at Holiday Inn from 1988 to 1997. Holiday Inn eventually spun this business off and Wright launched a lending platform at GMAC. When GMAC delevered in the mid-2000’s Wright’s platform was picked up by Silverton Bank but during the credit crisis the bank went under FDIC receivership. Wright then went to Stone Point Capital, a private equity investment firm based in Greenwich, Conn., which gave him a $25 million commitment to start Access Point Financial.
As of April 30, 2015, Access Point Financial has originated approximately $628 million. “Access Point is generating great track record generally getting over 8% yield and delinquency rates have been less than 1%,” said the source familiar with the deal. “They are the only pure play, specialty finance company that offers these types of loans.”