Money360 joins a growing list of “transitional” or “bridge” lenders tapping the commercial mortgage bond market for financing.
The firm’s inaugural transaction, M360 2018-CRE1, will initially be collateralized by 48 mortgages with a total balance of $329.7 million, according to Kroll Bond Rating Agency. That represents over half of the lender's $517.7 million of assets under management.
Unusually, for a first-time issuer, the deal will be actively managed: for the first 12 months after the closing date, Money360 will be able to use funds from any repaid principal to invest in both companion loans backed by the same collateral held in the trust as well as new loans.
Money360 originated all of the loans in the pool; 33 (64.8% of the balance) are whole loans and 15 (35.2%) are participations in larger loans that have unfunded portions held by Money360 outside of the trust.
Proceeds for over three quarters of the loans in the pool were used for refinance purposes (37 loans, 83.4%); proceeds for the remaining loans were used to acquire properties (10 loans, 14.1%) and in the case of one loan (2.5%) for both refinance and acquisition purposes.
Kroll cites as a risk the fact that Money360 is an “inexperienced collateral manager." The firm was founded in 2010 and currently has over $517.7 million in assets under management in small- to mid-balance commercial real estate loans ranging in size from $1 million to $20 million. M360 Advisors, the affiliate managing the CRE CLO, runs a range of credit strategies including structured credit and commercial real estate debt. Currently, the collateral manager and its affiliates have 36 professionals, including an eight-person team primarily responsible for its fund management business.
The transaction is also highly leveraged, according to Kroll; the loans used as collateral have a weighted average loan-to-value ratio of 125.9%, based on the rating agency’s own valuations. That’s slightly above the average of 124.9% for the 10 CRE CLO transactions rated by KBRA during the past six months, which ranged from 115.1% to 135%.
Kroll takes a mixed view of reinvestment periods. In its presale report, the rating agency notes that a managed CRE CLO "can benefit from ongoing, proactive management of the assets, particularly in times of distress. In the subject transaction, the collateral manager is permitted to direct the exchange of a defaulted or credit risk asset for an asset owned by any of its affiliates that satisfies the eligibility criteria."
While reinvestment periods can also result in "negative credit migration," Kroll feels that this risk is partially mitigated by eligibility criteria, which include a maximum principal balance of $15 million, maximum fully extended term of 3.5 years, and minimum loan-to-value ratio of 75% on an "as stabilized" basis, among others.
Also, the aggregate amount of "credit risk assets" that can be exchanged or sold for cash to Money360 or its affiliates is subject to caps of 2.5% and 5%, respectively, of the aggregate principal balance of the closing date mortgage assets.
And the reinvestment period will immediately terminate if the CRE CLO fails an interest-coverage or overcollateralization test.
This differs from other managed transactions where the ability to reinvestment is reinstated once a note protection test failure during the reinvestment period has been cured, according to Kroll.
Kroll expects to assign an AAA to the senior tranche of notes to be issued in the transaction, which benefits from 53% credit support. No super-senior tranches of notes will be issued.
By comparison, the senior, Marathon Asset Management only had to offer investors 46.8% credit enhancement on the senior AAA-rated tranche of a $377 million transaction completed in June. (That deal also featured a super senior tranche with 54% credit support.) And Southerland Asset Management offered 44.5% credit support on the senior tranche of a $278 million CRE CLO offered the same month.