Wells Fargo Goes It Alone on 1st Risk Retention Compliant CMBS

Wells Fargo teamed up with two other banks for the first commercial mortgage bond offering designed to comply with “skin in the game” rules, issued late last year.

But now that the risk retention rules have taken effect, it’s going it alone.

The bank launched a $634.9 million offering of commercial mortgage bonds Wednesday, Wells Fargo Commercial Mortgage Trust 2017-RC1, that is backed by 61 loans collateralized in turn by 78 properties.

Wells is holding onto a $31.7 million of the notes representing an eligible vertical interest, according to DBRS, which is rating the deal. That means the bank is retaining a portion of each class of notes to be issued, from the senior tranche to the riskiest slice.

In comparison, Wells was joined by Bank of American and Morgan Stanley in deal completed in August that served as a trial balloon for risk retetion. The three banks split the eligible vertical interest. All three hoped to receive favorable capital treatment for their holdings. But regulators reportedly told at least one of the banks, Morgan Stanley, that they weren't buying it.

The new deal will issue super senior notes with 30% credit enhancement that are rated triple-A by Fitch Ratings, Standard & Poor’s, in addition to DBRS.

Wells contributed 29.9% of the loans used as collateral; the rest of the collateral was originated by Rialto Mortgage Finance (30.8%), Argentic Real Estate Finance  (27.1%), National Cooperative Bank (7.8%) and C-III Commercial Mortgage (4.5%).

The collateral is comprised of older properties with a weighted average debt-to-service coverage (1.44x, according to Fitch) and loan-to-value (105.2%) that re more favorable than similarly-rated CMBS deals from 2016.

Those leverage metrics are improved, however, by a high concentration of multifamily properties – which, if excluded, lower the DSCR to 1.15x and increase the LTV to 109.5. Those levels are less favorable than 2016 CMBS averages, according to Fitch.

The largest loan in the pool, at $55 million, is tied to a portfolio of six hotels franchised from Hyatt Hotels Corp. It was used to help finance the $80.3 million purchase of the properties. The hotels are each over 20 years of age, which were renovated in 2015 as part of an overall $9.7 million capital improvements program since 2013.

Morgan Stanley and Bank of America are also going it alone. Morgan Stanley's relied on a third-party, an affiliate of the Blackstone Group, to hold a 5% interest in its first CMBS of the year.