Morgan Stanley, Wells Fargo and Bank of America are marketing $725.6 million of commercial mortgage bonds designed to meet requirements from regulators on both sides of the Atlantic to keep “skin in the game” of their deals.
The three banks are expected to purchase and retain 5% of each class of securities issued by Morgan Stanley Capital I Trust 2016-BNK2, or approximately $36,278,582, according to Fitch Ratings. In addition, the effective interest rate on their collective holdings is equal to the weighted average coupon of the deal. This is known as the vertical option for complying with U.S. rules that take effect Dec. 24. It’s the same strategy the trio employed in the first U.S. risk retention compliant deal, completed in August.
There are also provisions to ensure that a sufficient amount of the collateral for the bonds is either originated or seasoned by the three banks or their affiliates. This will put the deal in compliance with existing E.U. rules.
The August deal, Wells Fargo Commercial Mortgage Trust 2016-BNK1, was extremely well received by investors, pricing at levels that had not been seen in the CMBS market in months. It’s unclear how much of that was attributable to the fact that the banks’ interests were aligned with investors, as the collateral for the deal was also very high quality. But by putting this new deal in compliance with EU risk retention rules, the sponsors expand the universe of potential investors.
The collateral for BNK2 is also high quality. The pool’s leverage statistics are lower than those of other recent multi-borrower transactions rated by Fitch. It has a debt service coverage ratio of 1.28x and a loan-to-value ratio of 106.4%. (Fitch’s calculations are based on property valuations lower than recent appraisals.) By comparison, the year-to-date average DSCR for Fitch-rated deals is 1.19x and the year-to-date average LTV is 105.8%.
Among other ratings considerations Fitch cited in its presale report is the fact that the pool is relatively concentrated in a fe larger loans. The 10 biggest comprise 60% of the pool, which is greater than the average of 54.7% for deals rated by Fitch year to date.
The largest property type concentration is retail, at 40.9% of the pool, which is above the 2016 YTD levels of 29.1%. Hotel properties represent 14.6% of the pool, which is below the YTD 2016 average of 17.0% for fixed-rate transactions. Fitch considers loans secured by retail properties to have a higher than average probability of default, while loans secured by hotel properties have the highest probability of default.
Wells Fargo Bank is the master servicer; C-III Asset Management is the special servicer.
Fitch expects to assign AAA ratings to the super senior classes of the deal, which benefit from 30% credit enhancement, as well as to the so-called junior-A tranche, which benefits from 22.375% credit enhancement.