Morgan Stanley’s first offering of commercial mortgage bonds of the year offers unusually concentrated exposure to a few large properties.

The $666.6 million MSCI Commercial Mortgage Trust 2016-UBS9 is backed by 31 loans, but the top 10 account for 68.9% of the pool. That compares with an average of 49.3% for conduits rated by Fitch Ratings last year and 50.3% for the deals rated by Kroll Bond Rating Agency.

The deal also features an outsized share of affiliated borrowers (such as three outlet shopping centers sponsored by Simon Property Group) that lack cross-collateralization and cross-default protections for investors, according to rating agency reports.

The CMBS is the first for Morgan Stanley Mortgage Capital Holdings LLC since its 2015-UBS8 deal last November that had $611.8 million in notes backed by a larger segment of 57 commercial mortgages.

The trust will issue 21 certificate classes of senior and surbordinate notes. The structure includes five “super senior” structures totaling $466.6 million carrying  ‘AAA’ ratings and credit enhancement of 30%.  A sixth junior ‘AAA’-rated $47.5 million tranche carries CE of 22.88%.

The trust also plans to issue six tranches of interest-only notes which are unrated by KRBA, but with four having ratings from Fitch ranging from ‘AAA’ to ‘BB.’

What grabbed the ratings agencies’ attention were the concentration figures. “This concentration presents additional credit risk; should any of the larger loans default, the related loss would represent a higher proportion of the pool given the relative size of the loans,” KBRA’s report states. The largest borrowings are a $62 million loan for 525 Seventh Avenue, a Class-B office building in Manhattan’s Garment borough, and a $61.9 million loan to the U Haul AREC RW Portfolio of self-storage units in 12 states and the District of Columbia. Each loan represents a 9.3% slice.

Another office complex, a Class-A office tower at 2100 Ross in Dallas, Tx., is a $59.9 million loan accounting for 9% of the portfolio loan total.  

At 31 loans, the MSCI 2016-UBS9 deal “has the lowest loan count among all 120 KBRA rated conduits,” placing the trust certificates of the subordinate and mezzanine classes at higher risk of losses.

None of the loans in the pool are cross-collateralized or cross-defaulted, which makes the 15.6% exposure of two groups of loans noteworthy, according to KBRA. Outlet Centers owned and operated by Simon include the 8th (5.8% exposure), 12th (3.0%) and 19th (1.4%) largest loans in the pool.

The concern is that should any individual borrowing of the Simon properties – or that of two affiliated retail loan groupings in Dembs Roth Cross Group Portfolio (14th) and Dembs Roth Kancov Portfolio (19th) – become impaired,  “the related borrower may be less inclined to contribute capital in order to avoid default than it might otherwise be if the loans within the group were cross-collateralized and cross-defaulted,” according to KBRA.

The concentration is mitigated by the inclusion of at least two loans with standalone investment-grade characteristics among the top 10 loans. The fourth-largest loan, borrowed by GLP Industrial Portfolio B, represents 8.4% of the pool and is considered ‘A’ rated and secured by 142 warehouse, light industrial and flex logistic facilities in 11 states, per KBRA.

In all, the 31 loans are supported by 222 properties and have an average remaining loan term of 9.7 years. The weighted average loan coupon is 4.57%, according to KBRA.

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