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Top CRE lenders launch CMBS with increased risks

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Three major commercial mortgage lenders have teamed up again this year to securitize $871 million in properties in a CMBS deal that provides investors with a highly concentrated loan pool and higher leverage.

The BANK 2020-BNK29 transaction, expected to close at the end of November, securitizes 89 commercial properties spread across the U.S. and represents the 5th deal so far in 2020 underwritten by Bank of America, Morgan Stanley and Wells Fargo. The loans were contributed to the trust by those mortgage lenders.

Fitch Ratings notes in a Nov. 17 presale report that the loan pool is highly concentrated, with the pool’s 10 largest loans representing 65.1% of its cutoff balance. That compares to a concentration of 55.9% for comparable transactions year-to-date and 51.0% in 2019

The top three loans, comprising 250 W. 57th Street and 120 Wall Street in Manhattan, and Coleman Highline near the San Jose airport, make up 28.9% of the pool. Three of the pool’s top four properties — the Grace Building is the fourth — bring the pool’s concentration in New York City to 27.8%.

Fitch notes that the deal’s loan concentration index (LCI) is “considerably greater than the [year-to-date] 2020 and 2019 averages of 428 and 379, respectively.”

The BNK20 deal’s average leverage is also higher, at 1.34 times compared to 1.31 times year to date, and 1.26 times in 2019.

“The pool’s Fitch [loan-to-value] of 103.6% is above the YTD 2020 average of 99.3%, and generally inline with the 2019 average of 10.3.0%,” Fitch says.

The pool’s weighted average mortgage rate is 3.21%, which Fitch describes as well below historical levels as well as the year-to-date average of 3.67% and 2019’s average of 4.27%. Nevertheless, refinancing that low rate in a higher rate environment introduces default risk and reduces cash flows to pay investors.

Fitch says it has accounted for that risk by incorporating an interest-rate sensitivity that assumes an interest-rate floor of 5% for the term risk of most property types, 4.5% for multifamily properties, and 6.0% for hotel properties.

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