Citigroup is lining up the latest in what is becoming a long list of CMBS conduits with highly levered loans with very little amortization, creating the potential for big problems down the line.
A $1.2 billion pool of 86 loans on 108 properties backs Citigroup Commercial Mortgage Trust 2015-GC29, according to presale reports published by Fitch Ratings and Kroll Bond Ratings Agency.
The pool of mostly 10-year loans has weighted average loan-to-value (LTV) ratio, as calculated by Kroll, of 104.6%. That is higher than the average of the 22 CMBS conduits Kroll rated in the last six months. These transactions had LTVs ranging from 96.8% to 106.4%, with an average of 102.0%.
A significant number of those loans will pay only on interest for part (45) or all (five) of their terms. The pool is scheduled to amortize by only 8.4% of its initial balance prior to maturity, which is less than other recent transactions rated by Fitch. And the less amortization, the greater exposure to refinancing risk when the loan is due.
One loan representing 10% of the transaction pool has additional debt that exists outside of the trust. Another four loans representing 17% of the pool allow for the addition more debt at a future date. The amount of existing and/or permitted future subordinate debt is higher than the CMBS conduits rated by KBRA over the past six months, which ranged from 6.6% to 46.0%, with an average of 25.8%.
Exposing the pool to additional leverage increases borrower insolvency risk and may also introduce additional creditors that, according to Kroll, “could attempt to exercise remedies that are adverse to the trust, or support a bankruptcy plan that is adverse to the trust’s interests.”
The largest loan in the pool, Selig Office Portfolio (11.2%), permits both future mezzanine debt and future additional pari passu debt.
The loans were contributed by four mortgage loan sellers: Citigroup Global Markets Realty Corp. (43 loans, 51.4%), Goldman Sachs Mortgage Company (14 loans, 29.9%), Rialto Mortgage Funding LLC (22 loans, 16.0%), and Freedom Commercial Real Estate REL LLC (7 loans, 2.7%).
Fitch and Kroll have assigned preliminary AAA’ ratings to five super senior notes that are structured with 30% credit support; an A-S tranche of senior notes with credit enhancement at 25% will also be rated AAA’.