NorthStar Realty Finance, a New York-based commercial-property lender and investor, is marketing a $613 million, floating rate, commercial real estate loan obligation (CRE CLO), according to Kroll Bond Rating Agency (KBRA).

The sponsor has issued two prior CRE securitizations since 2012 totaling $1.2 billion.

NorthStar 2015-1 pools 20 loans secured by 81 properties located in 11 states. All of the loans were originated between September 2013 and September 2015. The fully extended maturity dates range from October 2018 to May 2021.

The vacancy rates are as high as 73.8% on five loans—significantly below the related collaterals sub-market occupancy levels, which range from 80% to 90%. The loans are Marian Village (fourth largest), O'Hare Plaza I & II (5th largest), Apex at Las Colinas (10th largest), 2 Executive Drive (12th largest) and Automation Parkway (13th largest).

Loan proceeds were used to refinance existing debt (13 loans, 75.5%) or for property acquisitions (7 loans, 24.5%).

The collateral pool includes 15 loans structured with third party LIBOR interest rate cap agreements. The rate cap agreement helps mitigate increased default risk from a sudden hike in interest rates and range from 2% to 3% with a weighted average of 2.62%.     

Although the loans are hedged against interest rate risk, the notes issued from the trust, which are based on one-month Libor, have no rate caps in place. According to the KBRA presale, "interest payments due on the notes are not subject to a cap based on the WA coupon of the underlying trust assets."

The lack of a hedge means that if rates rise and voluntary or involuntary prepayments occur with higher balances and/or coupons, there is a risk that the interest rate payments generated by the underlying loans may not be sufficient to pay monthly interest to some or all of the rated securities.

The trust collateral is highly leveraged and has a weighted average loan-to-value ratio, as calculated by KBRA, of 118.2%. Higher leverage exposes the pool to greater risk of default and higher overall loss severity should a default occur.

Six of the assets allow for future debt issuance that is not trust collateral and three of these trust assets also have a related junior participation interest that is held outside of the trust. One of these assets also has associated mezzanine indebtedness in place with a future funding component.

KBRA assigned preliminary 'AAA' ratings to $319 million of senior notes that benefit from 47.87% credit enhancement. The rating agency will not rate the class B through G notes.

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