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Värde's 2nd CRE CLO is more concentrated, less highly leveraged

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Värde Partners’ second CRE CLO is slightly less leveraged than its inaugural deal, completed in January. It is also more concentrated in a relatively small number of properties being rehabbed or converted to a new use.

The $462.3 million VMC 2018-FL2 is initially backed by 23 short-term, floating-rate commercial mortgages totaling $421.2 million and $41.1 million of cash that can be used to acquire two loans that will be underwritten after the deal closes, according to Kroll Bond Rating Agency.

Kroll puts the weighted average loan-to-value ratio at of 124.8%, which it considers to be “highly leveraged.” However, this is below the average (125.4%) of the 17 prior CRE CLO transactions the rating agency has rated over the past 12 months, which ranged from 115.1% to 135.3%. (Kroll calculates LTVs using its estimate of a “normalized sustainable property value,” which is generally lower than an appraised value.)

That is also lower than the weighted average LTV of 128.3% for Värde Partners’ prior deal, VMC 2018-FL1.

"Higher leverage implies lower borrower equity levels, greater default probability, and higher overall loss severity should a default occur," Kroll's presale report states.

Fitch Ratings puts the pool’s LTV much higher, at 152.6%, which is worse than the average of 102.4% for multi-borrower transactions it has rated year to date. (Most of Fitch's comparable are conduit commercial mortgage securitizations, as opposed to CRE CLOs).

Likewise, Fitch puts the deal's debt service coverage ratio at 0.74x, which is worse than the year-to-date average of 1.23X.

Värdes’ new transaction is more concentrated than the average of 17 other recent Kroll-rated CRE CLOs, which had property counts ranging from 19 to 54, for an average of 28.

“Securities backed by pools of loans that have a diversified distribution in terms of individual loan size can experience lower losses if one or a few large loans default relative to transactions with lower loan counts and less uniform balance distributions,” the presale report states.

The transaction also permits the trust to acquire companion loan participations related to the initial transaction collateral for a 36-month period post-closing.

Just over half of the loans funded property acquisitions (14, 50.2%) and just under half refinanced existing debt (11 loans, 49.8%).

The securitization trust will issue eight classes of rated notes; Kroll expects to assign an AAA to two senior tranches, a $253.11 million tranche that benefits from 45.2% subordination and a $28.89 million deal that benefits from 39% subordination. Rating for the six other tranches range from AA- to B-. There is also an unrated tranche of notes.

Fitch expects to assign an AAA to the senior-most tranche alone.

Wells Fargo and Goldman Sachs are the placement agents.

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