Goldman Sachs is marketing $1 billion of commercial mortgage bonds with heavy exposure to retail properties in secondary and tertiary markets, according to Kroll Bond Rating Agency.

Kroll has given preliminary ratings to the sixteen classes of certificates to be issued by GSMS 2015-GC32. There are six class A senior tranches totaling $772.4 million that are rated ‘AAA’ by Kroll and benefit from 30% credit enhancement. The class B, C, D, E, F, and J notes benefit from 17%, 12.75%, 7,625%, 5.625%, 4.625%, and 2.875% credit enhancement, respectively.

The deal is backed by 62 commercial mortgage loans that are secured by 222 properties. Loans in the pool have an average principal balance of $16.2 million a weighted average (WA) life of 9.1 years.  

Leverage for the overall pool is slightly higher than the last 19 CMBS conduit transactions rated by Kroll over the last six months. The Kroll-adjusted weighted average (WA) loan-to-value (KLTV) ratio is 103.4% compared to the average of 102.9% for the last 19 CMBS deals.

However, two loans in GSMS 2015- GC32: US Storage Mart (9th largest, 2.5%) and Alderwood Mall (11th largest, 2.4%), skew the pool with KLTVs of 45.9% and 56.8%, respectively. Without factoring in these loans, the pools WA KLTV would be 106.1% which is considerably higher than the 102.9% average for the last 19 transactions of this type. 

The highly-leveraged nature of this deal increases the riskiness of the transaction, as borrowers with relatively little equity are at greater risk of default.

The deal is heavily exposed to retail properties (39.5%), but also has a high percentage of lodging facilities (15.9%) and manufactured housing complexes (11.1%).  According to Kroll, 25.7% of the pool’s properties are rented by “needs based” tenants, for example a grocery and a drug store, which tend to be associated with less risk. Lodging facilities, however, are historically more volatile due to their dependence on nightly room rates. The properties are most heavily concentrated in California (19%), Texas (16.6%) and Colorado (12.7%).

A large portion of the riskiness of this deal lies in the fact that the majority of the properties (63.6%) in the collateral pool are located in secondary (44.4%) and tertiary (19.2%) markets. The remaining 36.4% of the pool exposed to primary markets is below the average of 44.8% exposure to primary markets for CMBS deals rated by Kroll over the past six months. Primary markets are known to better withstand fluctuations and downturns in the national economy, and in turn, are considered less risky.

The pool’s single tenant property exposure at 4.7% is lower than the average of 9.8% for deals rated over the past six months. Therefore, the pool is more heavily exposed to properties with a diversified tenant roster, which are typically considered to be less risky than properties that depend on a single tenant for its entire cash flow.

The largest loan in the pool totals $100 million dollars, while the top 10 loans sum to $517.1 million, or 51.6% of the loan portfolio, which is higher than the average of 46.5% for deals over the past six months. This increases the riskiness of the transaction because if any of the larger loans default, a large proportion of the overall balance is affected.   

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