Bridge deploys weaker-rated collateral in $525M CRE CLO
A real estate investment trust arm of Bridge Investment Group is pooling its weakest collateral pool to date for its next CRE CLO transaction of transitional and bridge loans used primarily for commercial property redevelopment.
BDS 2019-FL4 Ltd is a $525 million CRE CLO portfolio of rehab projects that Bridge has financed for various multifamily, office, retail and other property types.
The CRE CLO will be managed by its Bridge Debt Strategies Fund Manager LLC unit. The deal is sponsored by Bridge REIT, a subsidiary of a BDS fund that invests in properties across the U.S.
The initial portfolio of 20 whole-loan commercial mortgages with total balances of $459.37 million, plus a $65.53 million funded reserve for assets to be acquired during the deal’s 180-day ramp-up period.
It is the second transaction in 2019, which relaunched a CRE CLO deal in February that had previously been pulled during a late 2018 lull in the securitization market for CRE CLO assets.
The transaction has six tranches of floating-rate term loans, including a Class A tranche totaling $261.1 million priced at one-month Libor plus 115 basis points. Moody’s Investors Service and Kroll Bond Rating Agency have issued preliminary triple-A ratings for the notes.
The deal is highly leveraged (Kroll’s loan-to-value estimate is 127.5%, compared to 124.1% for 18 CRE CLO transactions rated by agency), and all of the assets are credit assessed at below investment grade, according to Moody’s.
Moody’s said the loans collectively have the weakest weighted average ratings factor (WARF) of any prior Bridge transaction at 5051, compared to previous deals that were all under 5000. (WARF numbers are a numerical representation of the credit ratings for each asset in a portfolio, with higher numbers assigned to lower-rated collateral. A higher WARF indicates greater collateral credit risk for investors.)
With riskier assets in tow, Bridge has boosted the protection for the senior noteholders in the latest deal. Bridge has built in enhancement levels to withstand losses of up to 49.5% of the pool before impacting the AAA tranches of the transaction. According to Bloomberg, a typical CRE CLO in 2016 had credit enhancement protections that only only brought senior-note losses when the decline hit 42%.
The largest loan is the pool is a $51 million pari passu refinance loan for the Element Towers office building complex in suburban Dallas. The loan is structured with a $1 million upfront reserve for capital improvements such as elevator modernization, as well as $8.73 million future funding obligations for upgrades to attract more tenants to the 67.9% leased property.
The CRE CLO deal has a two-year noncall and two-year reinvestment period, with an expected weighted average life of 5.5 years, according to presale reports.
Barclays, Wells Fargo and Amherst Pierpont are the placement agents on the deal.
Bridge is based in Salt Lake City and has $15 billion in assets under management.