The next offering of commercial mortgage bonds from Morgan Stanley and Bank of America has all of the risky hallmarks of recent deals, namely the inclusion of a few high quality loans that help offset the impact of much riskier loans, and low overall amortization.

But it is the structure of deal, and not its collateral, that is getting the most attention.

Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28 is backed by 42 fixed-rate loans with a total balance of $955 million that are secured by 161 commercial and multifamily properties. It is being rated by Fitch Ratings, Moody’s Investors Service and DBRS.

All three rating agencies assigned the same rating, triple-A to both the senior and super-senior tranches of the deal, which benefit from 25% and 30% credit enhancement, respectively. It is the middle of the capital stack where they disagree. DBRS assigned a triple-B to the class E notes, which benefits from 6.375% credit support and represents just 3.0% of the deal; and a double-B to the class F notes, which benefit from 5.375% credit support and represents just 1.5% of the deal. Moody’s did not rate either tranche.

In a report published last week, Fitch noted that both the class E and class F notes are exchangeable into other classes, a feature not seen in noninvestment grade tranches of CMBS since the financial crisis.  The rating agency is concerned that these exchangeable classes raise the question of sufficient tranche thickness.  “Fitch has long expressed to the market concerns about accelerated loss given default for classes below a 1.0% tranche thickness, a threshold maintained in CMBS 2.0 but commonly breached in CMBS 1.0,” the report states.

All three rating agencies point out that there are two large, high-quality loans representing 16.7% of the pool balance that help offset weaker credit characteristics of the rest of the pool.  One is secured by Penn Square, a 1.06 million square foot super-regional mall located in Oklahoma City, OK; another is secured by the GLP Industrial Portfolio A, comprising 114 high grade industrial properties located throughout the United States.

Including these loans, the weighted average loan-to-value ratio, as calculated by Moody’s is 108.9%. This is better than the average of 115.8% for conduits rated by Moody’s in 2015. Excluding these two loans, however, Moody’s puts the weighted average LTV at a “relatively high” 120.3%.

Fitch calculates the weighted average LTV of the pool at 105.3%, but that jumps to 115.1% without the high quality loans.

DBRS’ presale report focuses on a different metric, the weighted average debt service coverage ratio. Based on A-note balances alone, this is “strong” at 1.77x. Even excluding the two high-quality loans, however, the deal has a “moderate” debt service coverage ratio of 1.41x.

The collateral isn’t just highly leveraged, it also pays amortizes slowly. Six loans (27% of the pool balance) pay only interest, and no principal, for their entire terms; another 23 (54.2%) pay only interest for part of their terms; and just 13 loans (18.7) amortize over their entire terms.

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