Lenders are keeping their own skin in the game of the next offering of commercial mortgage bonds.
The $977 million Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3 is backed by 63 fixed-rate loans secured by 94 commercial and multifamily properties.
In order to comply with U.S. risk retention guidelines, Bank of America and other lenders who contributed loans are expected to purchase and retain an “eligible vertical interest” in each class of securities to be issued equal to $48.9 million, or 5% of the entire deal. These securities will have an effective interest rate equal to the weighted average coupon rate, according to Fitch Ratings.
Those loan sellers include Wells Fargo, Morgan Stanley, Deutsche Bank, Barclays, Citigroup, Société Générale, and Cantor Fitzgerald. However, Fitch’s presale report does not indicate how the risk retention interest is being divvied up among the lenders, or even if all of the lenders are keeping skin in the game.
It's understood to be more attractive for banks to hold the interest than nonbanks, since they may recieve more favorable capital treatment.
Among the primary rating considerations for Fitch is the fact that the leverage in the collateral pool is in line with that of other multi-borrower transactions it has rated recently. It puts the debt service coverage ratio at 1.21x and the loan-to-value ratio at 103.9%. That’s comparable to the 2016 averages of 1.21x and 105.2%.
However, these metrics are boosted by the inclusion of two loans, representing 7.2% of the pool, which have investment-grade credit opinions: 85 Tenth Avenue (5.1% of the pool) has an investment grade credit opinion of BBB a stand-alone basis. Potomac Mills (2.1% of the pool) has an investment-grade credit opinion of BBB on a stand-alone basis.
Excluding the investment-grade credit opinion loans, the pool has a Fitch DSCR and LTV of 1.20x and 107.0%, respectively, still better than the 2016 normalized averages of 1.16x and 109.9%.
Another rating consideration, albeit a negative one, is the fact that the amortization of the loans is well below average. Sixteen loans, representing 54.0% of the pool, including 14 of the top 15 loans, pay only interest, and no principal, for their entire terms.
An additional 19 loans, representing 20.7% of the pool, pay only interest for parts of their terms; these periods range from10 months to 57 months.
This lack of amortization increases the risk that the loans will be difficult to refinance at the end of their terms, particularly if the value of the properties have declined.