Morgan Stanley/BAML Conduit Relies on Hybrid Risk Retention Strategy

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Morgan Stanley and Bank of America Merrill Lynch are marketing a commercial mortgage securitization that relies on the “L-shaped” strategy to comply with risk retention.

In order to align their interest with those of investors, Morgan Stanley and KeyBank (the third loan seller) are holding on to a portion of each class of securities to be issued equivalent to 2.45% of the economic risk of the deal; in addition, a fund controlled by private equity firm KKR will hold on the most junior class of securities to be issued equivalent to a 2.57% interest.

The $702 million MSBAM 2017-C33 is the third CMBS to launch in what is expected to be a busy week; it follows on the heels of $900 million conduit launched by Deutsche Bank and Citigroup on Tuesday; a $465 million deal launched by Goldman Sachs on Monday is backed by a portfolio of office properties in Houston.

Regulators granted an exception allowing CMBS to satisfy the risk retention requirement (or in this case, partially satisfy it) if a third party purchases and retains a 5% stake in deals.

The latest CBMSl is collateralized by 44 fixed-rate loans secured by 70 commercial properties, according to Fitch Ratings and DBRS.

Among the strengths of the deal, according to Fitch, is the above-average amortization of the collateral. Loans in the pool will pay down by 11.4% over the life of the deal, which is above the average for deals it has rated this year (7.8%) and last year (10.4%).  

DBRS cites what it sees as the deal’s “low” leverage; Fitch, on the other hand, characterizes the deal’s leverage as “average.” It puts the loan-to-value ratio at 102.5% and the debt service coverage ratio at 1.22X.

Both rating agencies see as a major weakness the fact that the largest 10 loans account for 56.7% of the collateral pool, which is more concentrated than the 2016 average of 54.8% and the YTD 2017 average of 53.2% for fixed-rate transactions rated by Fitch.

DBRS’ presale report cites what it describes as single-tenant risk: Six loans, comprising 17.5% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. The rating agency is also concerned about heavy exposure to self-storage and hospitality assets, which on a combined basis represent 31.4% of the pool across 17 loans, and have volatile income. 

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