LStar Capital Finance, the credit affiliate of Lone Star Funds, a global private equity firm, is marketing a $500 million of commercial mortgage securitization, according to rating agency reports.

The deal, LSTAR Commercial Mortgage Trust 2016-4, is backed by 22 loans secured by 26 properties located in 10 states.

Moody’s Investors Service has assigned preliminary ‘AAA’ ratings to three senior tranches of notes that benefit from 52% credit support. It is not rating any subordinate tranches.

Among the strengths of the deal, according to Moody’s, is the high quality of many of the properties and the fact that so 40.3% of the pool balance secured by real estate located in the major markets of New York (9.6%), Chicago (13.9%), and San Francisco/San Jose (16.8%).

Also, the pool does not contain loans collateralized by properties encumbered by subordinate debt financing. Further, future subordinate and mezzanine indebtedness are not permitted.

Even without subordinate financing, however, these properties are very highly leveraged. The loan pool’s weighted average loan-to-value ratio, as measured by Moody’s, is 131.7%, well above the average of 118.3% for conduit transactions rated in the first quarter of this year.

Moreover, these loans will amortize very little over the life of the deal, putting investors at risk should the properties deteriorate in value.  Six loans representing 46.3% of the pool balance, pay only interest, and no principal, for their entire terms. Another 11, representing 38.2% of the pool, pay only interest for part of their terms. Just five loans representing 15.4% of the pool amortization over their entire terms.

Moody’s also cited as a risk the fact that the pool includes several loans that were only recently fully occupied after being having high vacancies. Approximately 25.9% of the pool balance (including the Elements at Mueller, Residence Inn Menlo Park, Provenza at Barker Cypress, and the Sunrise by the Park Apartments loans) has rather limited operating history since the associated properties were delivered over the last two years.

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