The latest commercial mortgage bonds on offer by Morgan Stanley and Bank of America Merrill Lynch are backed by a large number of highly leverage loans, according to rating agency reports.
The bulk of loans used as collateral for MSBAM 2015 C25 (44, or 80.6%), have loan to value ratios, as calculated by Kroll (KLTVs), in excess of 100%. And 20 of those loans have KLTV in excess of 110%.
Kroll said in its presale report that the proportion of highly leverage loans is among the highest of the conduits it rated in the last six months, which ranged from 52.4% to 81.4%, with an average of 69.5%. As a result, the overall pool has a weighted average in-trust KLTV of 107.5%, which is the second highest among the 21 CMBS conduits KBRA rated in the last six months.
Notably, no investment grade loans were included in the collateral pool. Since April, there have been several CMBS conduits that use investment grade loans (those rated single-A or above with LTVs less than 70%) to lower overall leverage, resulting in a reduced credit enhancement requirements.
The super senior notes to be issued by MSBAM 2015 C25 have been assigned preliminary triple-A ratings by both Kroll and Fitch Ratings; these notes benefit from 30% credit enhancement. The senior notes, which have less credit enhancement at 26.125%, are also rated triple-A. At the subordinate level, the class D with credit support at 8.375% are rated triple-B-minus.
Although leverage has increased in the pool, Kroll believes that the MSBAM C25 transaction benefits from more uniform risk distribution relative to deals that have slightly less overall leverage, but only because their collateral includes some investment grade loans.
"Over the last three months, KBRA has rated 13 transactions, 11 of which had exposure to IG loans ranging from 4.9% to 18.8% of the pool, which skewed the overall credit metrics, including in-trust KLTV, by 2.4% to 9.6%," the presale report states. "Had the IG loans not been present, the resulting in-trust KLTVs would range from 102.1% to 109.6% with an average of 106.8%."
In addition to high leverage, many of the loans backing MSBAM C25 amortize slowly. Five, accounting for 22.1% of the pool, pay only interest for their entire terms, while 32 loans accounting for 54.9% of the pool pay only interest for part of their terms. The pool is scheduled to amortize by 10.1% of the initial pool balance ($1 billion) prior to maturity date of October 2048. This, according to Fitch, is worse than the averages of 12.0% and 12.4% for CMBS that it rated in 2014 and for the year to date, respectively.
