JPMorgan is relying on someone else to keep “skin in the game” of its next offering of commercial mortgage bonds.  

An entity controlled by Starwood Mortgage Capital will hold on to 5% of the economic risk of the $1.09 billion J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-JP5 through what is known as an   “eligible horizontal residual interest,” according to Fitch ratings. That means Starwood will retain 5% of the fair value of each class of securities to be issued in the transaction.

Though the deal carries JPMorgan’s name, Starwood contributed some of the collateral. (Fitch’s presale report does not indicate exactly how much.) The 43 loans were originated by a who’s who in the CMBS market, including joined by Deutsche Bank, Goldman Sachs, Barclays Bank, Morgan Stanley Bank, and Société Générale.

The overall leverage in the collateral pool is slightly better than those of other similar transactions that Fitch has rated recently. The pool’s debt service coverage ratio, as measured by Fitch, is 1.20x is slightly more favorable than the year-to-date average of 1.17x and similar to the 2016 average of 1.21x. Fitch puts the pool’s loan-to-value ratio at at 102.1%, an improvement over the year-to-date average of 106.1% and the 2016 average 105.2%.

Like many recent transactions, however, this one relies on the inclusion of a couple of large, high quality loans to boost its overall credit metrics. The two largest loans, Hilton Hawaiian Village (7.3% of the pool) and Moffett Gateway (7.3% of the pool), have investment-grade credit opinions of BBB–, on a stand-alone basis, from Fitch. The two loans have a weighted average Fitch DSCR and Fitch LTV of 1.50x and 64.0%, respectively.

Moody's has an investment grade credit assessement on just one of the loans, Hilton Hawaii Village, though it is higher than Fitch's, at aa3. 

Moody's cites as a strength of the deal its relatively low concentration, 3.4%, of properties in small or tertiary markets. This share is well below the average of 19.3% for conduits rated by Moody’s in 2016. "Properties situated in major markets tend to exhibit more cash flow and capitalization rate stability over time compared to assets located in smaller or tertiary markets," the presale report states.

Both Fitch and Moody expect to assign AAA ratings to both the super-senior classes at securities, which benefit from 30% credit enhancement, and the so-called “junior A” class, which benefit from 23.5% credit enhancement. 

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