Kroll Bond Ratings Agency assigned a preliminary ‘AAA’ ratings to the class A notes issued under the Deutsche Bank led, REO-to-Rental securitization issued by Blackstone.
The deal, dubbed Invitation Homes 2013-SFR1, has been long anticipated and is the first securitization of single family home rentals.
The securitization is collateralized by a $479.1 million non-recourse, first lien, floating rate mortgage loan (Loan) that will be originated by German American Capital Corporation on the securitization closing date in November 2013 and funded with the proceeds from the sale of the certificates.
The Loan is secured by the borrower’s fee simple interest in 3,207 one to four unit residential properties located in five states: Arizona, California, Georgia, Florida and Illinois.
The Loan has a two-year term with three, 12-month extension options and generally amortizes on a monthly basis in an amount equal to one percent per annum of the Loan’s outstanding principal balance on the origination date.
KBRA said it used a hybrid analysis to rate the deal, which “incorporated elements of both our CMBS and RMBS methodologies, as the underlying real estate contains commercial and residential characteristics.”
Along with the ‘AAA’ –rated class A notes, the structure will also issue ‘AA’-rated class B notes, ‘A’ –rated class C notes, ‘BBB’-rated class D notes, ‘BBB-’-rated class E notes and ‘BB’-rated class F notes.
One challenge in rating the new asset class was its lack of historical performance data. “The model is unproved and there is little directly applicable data with respect to the credit performance of a large portfolio of SFR homes,” said KBRA in the presale report.
KBRA said that as a result, it applied relevant element of its CMBS and RMBS methodologies and used “conservative assumptions” to calculate default and liquidation risks.
Fitch Ratings said this week that based on this lack of data it would have likely capped “its ratings at the ‘A’ level” for the REO-to-rental securitizations.
It’s not just the insufficient history that made Fitch more conservative about the asset class, the ratings agency that the investors' security interest in the single family rental homes could impact recovery upon enforcement.
Mortgages provide investors with first lien and perfected security interest in the actual homes. On the other hand, an equity pledge structure, limits recovery to the sponsors' equity in their investment.
“Should a transaction underperform or face refinancing challenges at maturity, sponsors subject to potential enforcement may be more likely to consider bankruptcy protection,” said Fitch. Under this scenario, if the sponsor is allowed “to incur post-petition debt secured by the properties, the value of the sponsors' equity and investors' recovery prospects diminishes.”
However, KBRA explained in its presale report that the loan in Blackstone’s deal is secured by first priority mortgages on the properties, so the trust will in fact have a first priority lien and security interest in the single family rental properties.
“The utilization of mortgage in this transaction was essential in assigning an ‘AAA’ rating,” said KBRA in the presale.
Moody's Investors Service is also expected to rated the deal and plans to publishe its presale report today.