Wells Fargo has joined the cadre of banks using a few, large, high-quality commercial mortgages to boost the overall credit metrics of their commercial mortgage bonds.
The collateral for Wells Fargo Commercial Mortgage Trust 2015- LC-22 includes 10 co-op loans that drive the pool’s overall in-trust loan-to-value ratio, as measured by Moody’s Investors Service, to 109.5%. Without these 10 loans, the LTV of the pool would be even higher, at 113%.
Since April, several other banks have completed CMBS conduits backed by a mix of below investment grade and investment grade loans. According report that Kroll Bond Rating Agency published on Sept. 2, the four such transactions it rated had exposure to investment grade loans ranging from 1.3% to 20.4%.
These loans have lower leverage than typical conduit loans, good structure, experienced sponsorship and are secured by good quality properties in primary markets.
But this use of investment grade loans coincides with a rise in exposure to high leverage loans (those with LTVs greater than 110%) in CMBS conduit pools. Kroll said that proportion of high leverage loans now represents more than a third of total exposure in conduits completed this year. Furthermore, the presence of “ultra” high leverage loans, those with LTVs in excess of 120%, has tripled year to date, and currently stands at 6.1%.
The net result of this "credit bar-belling" is that masks overall pool leverage. Among deals rated by Kroll year to date, the average LTV for pools that included investment grade loans dropped by more than 3.0 percentage points, to 102.8% from 106.0% without the high quality loans. In some cases, masking effect was even more marked; as much as 10.0 percentage points. “It is becoming increasingly prevalent to see deals with meaningful exposure to lower leverage loans that skew a pool’s overall credit metrics,” the report stated.
Given current market dynamics, Kroll expect the presence of high leverage loans to rise. Regardless of credit bar-belling, however, “securitizations with higher proportions of high leverage loans will have higher overall loss potential and continue to receive higher scrutiny during the analytical process," the report states.
Kroll has yet to issue a presale report on Well’s deal.
Fitch Ratings and Moody’s have assigned preliminary ‘AAA’/‘Aaa’ ratings to the super senior class A notes, which benefit from 30% credit enhancement.
On the junior class A notes, which benefit from 22.75% credit enhancement, their ratings diverge: Fitch assigned a preliminary ‘AAA’ to the notes while Moody’s plans to rate them at ‘Aa1’.
Moody’s is only rating the senior notes.
At the subordinate level, the trust offers Fitch-rated notes that range from ‘AA-‘ to ‘B-‘.
The transaction pools 100 loans that are secured by 106 properties; the largest property type concentration is multifamily.
Eight of the ten co-op loans, which make-up 3.4% of the pool balance, are backed by properties encumbered by additional financing in the form of letter of credit. Two loans (10.8% of the pool balance) are backed by property encumbered by mezzanine secured debt that is not part of the securitization the trust totaling $13.3 million. Including this debt, Moody’s puts the LTV 111.1% (or 114.6%, excluding co-op loans).
Fifty-three loans (37.5% of the pool balance versus 32.9% of recently rated Moody’s pools) pay both principal and interest for their entire terms. Thirty-six loans (50.5%) pay only interest, and no principal, for an initial periods. And 11 loans (12.0%) pay only interest and no principal for their entire terms.
The loans were purchased from Ladder Capital Finance, Rialto Mortgage Finance, Wells Fargo Bank and National Cooperative Bank.