Ask and ye shall receive.
Some commercial mortgage bond investors would like to see sponsors of deals eat even more of their own cooking. And that appears to be what Goldman Sachs is doing in a transaction that launched Wednesday.
The $1.06 billion GSMS 2017-GS5 is backed by 32 first-mortgage liens on a portfolio of 72 properties. An affiliate of Goldman will retain a portion of several different tranche of securities to be issued representing 6.3% of the deal, or approximately $67.2 million, according to Fitch Ratings. That’s more than the 5% required under rules that took effect at the end of December.
In addition, a third party investor, an affiliate of Rialto Capital Advisors , will retain a portion of the riskiest securities to be issues representing 2.7% of the deal, or $28.7 million.
In total, the two entities are keeping 9%, or nearly twice the required amount of “skin in the game” of the deal.
Risk retention rules, enacted as part of Dodd-Frank, are designed to encourage stricture underwriting, and by some credit metrics, the loans backing GSMS 2017-GS5 are less risky. The weighted average loan-to-value ratio, as calculated by Fitch, is 98.3%. Even excluding two large loans with investment grade characteristics, the WA LTV is 103.7%, which is better than that of other recent Fitch-rated transactions.
Fitch also puts the weighted average debt service coverage ratio (excluding the two big, high quality loans) at 1.26x, which compares favorably with the year-to-date average of 1.15x.
On the other hand, there is a limited amount of amortization in the collateral pool, which could result in increased leverage in the future and make the loans more difficult to refinance. There are 27 loans, or 85.3% of the pool, that pay only interest, and no principal, for at least part of their terms. That’s a significantly higher percentage than transactions that Fitch has rated since 2013.
Based on the scheduled balance at maturity, the pool will pay down just 4.4%.
The largest loan exposures is to 350 Park Avenue (9.42%). The 10 largest loans represent 64.2% of the portfolio balance.
Both Fitch and Morningstar Credit Ratings cited the minimal exposure to loans on hotels as a positive. There are only two hotel loans in the portfolio representing 2.6% of the balance.
Both credit rating agencies expect to assign triple-A ratings to the senior classes of notes to be issued, which benefit from 30% credit enhancement, as well as to a subordinate tranche with 22.5% credit enhancement.