UBS Takes Lead on CMBS Conduit for a Change

UBS is marketing its first offering of commercial mortgage bonds in four years, so perhaps it’s no surprise that the bank is relying on a third party to take skin in the game of the deal.

Although UBS has been actively contributing loans to CMBS conduits in recent years, the $948.9 million UBS 2017-C1 is the first transaction it has led since, 2013, according to Kroll Bond Rating Agency.

The bonds are collateralized by 67 commercial mortgage loans secured by 134 properties. The loan were acquired from six sellers, with UBS’s New York branch contributing the most (17 loans, 32.5%), followed by Rialto Mortgage Finance (12 loans, 15.5%), Natixis Real Estate Capital (10 loans, 14.5%), Wells Fargo Bank (10 loans, 14.3%), Société Générale (8 loans, 11.8%), and CIBC.

In order to satisfy rules designed to align the interest of the sponsor with those of investors, NRFC Income Opportunity Securities Holdings, and not UBS, will purchase the class D-RR, E-RR, F-RR, G-RR, and NR-RR certificates, representing at least 5% of the fair value of the transaction. This is possible thanks to a workaround unique to the CMBS market. By comparison, the sponsor s of most recent transactions have held kept some of the required skin in the game.

In many other respects, however, the transaction is similar to recently issued conduits. The overall pool has a weighted average loan-to-value ratio, as measured by Kroll, of 95.1%, within the 93.3%-108.4% range of the last 12 CMBS conduits rated by Kroll. And like some of these deals, leverage would have been higher if not for the inclusion of two loans (7% of the balance) with investment grade characteristics: Apple Sunnyvale, a Class-A single-tenant office building in Silicon Valley, and 75 Broad Street, a Class-B multi-tenant office building in New York’s financial district.

Also typical of recently conduits, the pool includes a large number of loans (11 loans, 33.1%) that were split off from larger loans securitized in other transactions. This means investors may already be exposed to the same properties, and could complicate workouts should the loans go bad. KBRA views “properly structured” pari passu loans as “credit neutral,” however.

One unusual feature of the pool is its exposure to student housing (7.5% of the balance), which, according to Kroll, can volatile income than traditional multifamily properties. That’s because sudents generally occupy units for shorter periods of time than traditional tenants, resulting in higher turnover costs.

Kroll and Fitch Ratings both expects to assign triple-A ratings to five tranches of super senior notes, which benefit from 30% credit enhancement, as well as to a senior tranche with only 20% credit enhancement.