The Blackstone Group is preparing what will be the largest securitization of “transitional” commercial property since the financial crisis
The deal, BXMT 2017-FL1, weighs in at $1 billion, or more than twice the size of most other commercial real estate collateralized loan obligations issued post-crisis.
Its size is not only thing that sets it apart, however.
Unlike any other type of commercial real estate securitization, including CRE CLOs and CMBS, BXMT 2017-FL1 provides the sponsor the ability to meaningfully modify up to 10 loans in its portfolio, even if they are performing. These modifications can take the form of, among other things, an increase in loan balance, modification of loan maturity dates, and the reduction of loan coupons, according to Kroll Bond Rating Agency, which is rating the deal.
“This feature provides the sponsor the ability to actively manage the loan collateral in a manner that is similar to their asset management strategy of balance-sheet loans,” the presale report states.
While that flexibility may benefit Blackstone, the modifications may result in deterioration of loan-level and pool-level credit metrics, such as higher loan-to-value ratios, lower debt service coverage and debt yields, and longer loan terms.
Another usual features is that all by 31 loans in the collateral pool are equally sized and are noncontrolling interests, or “participations” in larger loans. Though they are minority stakes, they rank "pari passu," with an equal claim. By comparison, most CRE-CLOs hold a controlling interest, if not all, of a senior loan on a property, though these properties may be encumbered by additional debt held outside the trusts. In this case, Blackstone holds the remaining interests in these loans on its balance sheet.
All told, the loans are collateralized by 71 properties that are being fixed up for converted from one kind of use to another.
Kroll sees this significant “pari passu” exposure as a positive credit feature, since it creates an alignment of interest between Blackstone and investors in the CRE-CLO.
Another plus for Kroll is the fact that the properties backing loans in the portfolio are of higher overall quality than any other CRE CLO it has rated to date: The pool’s weighted average property score was 3.49. Four of the properties are nationally landmarked and are well known within their respective markets: Woolworth Tower (largest, 3.2%, Lower Manhattan), Chicago Board of Trade (5th largest, 3.2%, Chicago), 275 Madison Ave. (4th largest, 3.2%, Midtown Manhattan) and Douglas Entrance (3.2%, Miami).
BXMT 2017-FL1 also has the ability to acquire additional participations in loans in the portfolio after the deal closes, but this is fairly standard for CRE-CLOs.
The majority of the loans (17 loans, 54.8%) were originated in 2017, while the remaining loans were originated in 2016 (10, 32.3%), 2015 (2, 6.5%) and 2014 (2, 6.5%).
Another way that Blackstone is pushing the envelope: The trust loan collateral is highly leveraged, with a weighted average in-trust loan-to-value ratio, as calculated by Kroll, 122.2%. That’s higher than the seven prior CRE CLO transactions Kroll has rated this year, where the average in-trust KLTV was 117.4%, and ranged from 112.0% to 121.8%.
Kroll expects to assign an AAA to the senior tranches of notes to be issued in the transaction.
