This Citi, Deutsche CMBS takes a bite out of the Big Apple

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Deutsche Bank and Citigroup are marketing $931.6 million of commercial mortgage bonds with heavy exposure to three Manhattan skyscrapers that many investors may already hold in their portfolios.

CD 2017-CD5 is a conduit transaction collateralized by 48 commercial mortgage loans secured by 134 properties. The largest loan, representing 10.7% of the portfolio, is a portion of a mortgage on the General Motors Building that has been used as collateral for at least two other CMBS.

The second-largest loan (6.7% of the portfolio) is a portion of mortgage on Olympic Tower, another office/retail complex along Fifth Avenue in midtown Manhattan that serves as collateral for another transaction.

And the fourth largest loan (5.5%) is a portion of a mortgage on an entire city block bounded by Park Avenue, Lexington Avenue, 46th Street and 47th Street; another portion of this mortgage also serves as collateral for another CMBS.

In total, seven loans (36.6%) are each structured as split loans where the mortgaged properties securing such loans also secure one or more pari passu loans, according to Kroll Bond Rating Agency. And, in three cases, the properties are also encumbered by subordinate companion loans.

It's becoming increasingly common to split large commercial mortgages up into multiple notes that can serve as collateral for several CMBS. This avoids having a single loan account for too large a percentage of the collateral pool. But it also means that investors in multiple conduits need to pay close attention, lest they end up placing bigger bets than they want.

In addition, certain loans in the pool, including the General Motors Building, Olympic Tower, 245 Park Avenue, and Gurnee Mills (17th largest, 2.1%), allow the borrowers to enter into Property Assessed Clean Energy loans that are repaid through multiyear assessments against the property. The borrower must obtain both lender consent and, in some cases, a no downgrade confirmation from the rating agencies as a condition to entering into a PACE loan.

The General Motors Building, Olympic Tower and 245 Park Avenue all have credit characteristics commensurate with investment-grade, which helps reduce the overall leverage in the collateral pool.

The pool’s weighted average in-trust loan-to-value ratio of 92.2%, as measured by Kroll. That is below the average of 97.5% for the 12 CMBS conduits it has rated over the last six months. Additionally, the pool’s exposure to loans with LTVs in excess of 100% (27 loans, 43.2%) is lower than the average for the comparable set (58%).

Moody's Investors Service calculates the in-trust LTV to be higher, at 106.7%. However, this is better than the 112.9% average for conduits the rating agency rated in 2016.

Absent defaults, the scheduled deleveraging that will occur from amortization will reduce the aggregate pool principal balance by 9.5% through the life of the transaction, which is above the average of 8.9% for conduits rated by Kroll.

More than half of the pool (14 loans, 51.1%) have existing and/or permit future subordinate indebtedness, which is higher than any of the conduits rated by Kroll over the past six months.

CD 2017-CD5 will issue 18 classes of certificates, 12 of which are entitled to principal and interest, five classes receive interest-only, and one class is a residual interest representing 3.8% of the aggregate balance. The residual interest will be held by Deutsche and Citi in order to satisfy rules requiring sponsor to have skin in the game of deals.

To satisfy the remaining risk retention requirements, a third party purchaser, RREF III-D AIV RR, will purchase and retain two other classes of certificates representing approximately 1.2% of the aggregate balance.

Both Moody's and Kroll expect to assign triple-A ratings to the super senior tranches to be issued, which benefit from 30% credit enhancement. Kroll also expects to assign an AAA to the so-called junior A tranche, which benefit from 18.5% credit support; Moody's rates this tranche lower at Aa3.

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