Barclays launched last week’s only offering of commercial mortgage bonds, the $855.7 million BBCMS Mortgage Trust 2017-C1.
The collateral consists of 58 fixed-rate loans secured by 75 commercial and multifamily properties. Barclays contributed 43.4% of the loans and UBS another 29.7%; the remaining 26.9% were contributed by Rialto Mortgage Finance, a unit of homebuilder Lennar.
In a twist, it is Rialto, and not one of the banks, that will be holding a 5% of each class of securities to be issued in to satisfy the risk retention requirement. To only bank sponsors have held “vertical” stakes, in part because they may be able to receive favorable capital treatment for them.
Less unusual is the use of credit barbelling: two of the largest 11 loans, Merrill Lynch Drive and State Farm Data Center, though unrated, have characteristics of investment-grade ratings. These two loans, which represent 7.8% of the pool, help offset riskier characteristics of some other loans.
In its presale report, DBRS pointed to the high concentration of loans with an low debt-service coverage ratios, which it said could make them difficult to refinance upon maturity. The weighted average DSCR, as calculated DBRS, is 1.04x. Moreover, 24, representing 52.3% of the pool, have DSCRs of less than 1.00x. Eleven of these loans comprising 32.0% of the pool have DBRS Refi DSCRs less than 0.90x
DBRS is also concerned about the deal’s heavy exposure to office and retail properties, which have underperformed other sectors recently. Loans backed by offices account for 43.4% of the pool and loans backed by retail account for 23.3%.
Lack of amortization is another concern. Thirteen loans, representing 47.3% of the pool, pay only interest and no principal for their entire terms. An additional 18 loans, representing 22.6% of the pool, have partial interest-only periods remaining that range from 24 months to 60 months.
Despite these concerns, DBRS expects to assign an AAA to both the super senior and senior classes of notes to be issued by the trust.
