Wells Fargo's Next CMBS Has High Exposure to Pari Passu Loans

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Wells Fargo Commercial Mortgage Securities is marketing nearly $1 billion in commercial mortgage bonds with a higher-than-average exposure to single-tenant loans and exposure to external pari passu borrowings.

The deal comes just weeks after the bank’s previous commercial mortgage securitization, the $637 million Wells Fargo Commercial Mortgage Trust 2017-RB1.

Bank 2017-BNK4 is a conduit CMBS transaction collateralized by 46 commercial mortgage loans secured by 64 properties, according to presale report published Tuesday by Fitch Ratings and Kroll Bond Rating Agency.

Each firm has assigned preliminary triple-A ratings to $625.62 million in super senior  notes,  as well as to $67 million in senior notes.

In order to comply with risk retention rules, Wells Fargo will retain an “eligible vertical interest” in the of $50.4 million of the notes.

The loans, with an average coupon of 4.8%, have balances as small as $1.8 million; the largest, for $70 million, is secured by the D.C. Office Portfolio of three adjacent office properties in downtown Washington, D.C. Other major loans include The Summit Birmingham (6.1%), One West 34th Street (6%), Pentagon Center (5.5%) and JW Marriott Desert Springs (5.4%), all representing 29.9% of the initial pool balance.

The loans were sold by Bank of America (17 loans, 42.4% of the pool); Morgan Stanley Mortgage Capital Holdings (15 loans, 29.4% of the pool) and Wells Fargo, which sold 14 loans or 28.2% of the pool.

KBRA noted some concerns with the pool: 10 loans, including eight in the top 10 representing 43% of the pool’s balance, are structured as split loans that have one or more pari passu loans not included in the trust. The overall pool has a weighted loan-to-value ratio (as measured by KBRA), above the 98.8% average of 15 other CMBS conduit transactions rated by KBRA over the past six months, the agency noted.

Also 11 of the loans (26.8% of the pool) are secured in whole or part by single tenancy, which can present higher risk due to exposure of tighter tenant concentration.

Some of the loans also have riskier tenants. The third-largest loan in the pool – One West 34th Street in New York – is anchored by a Bebe Stores location representing nearly 20% of its base rent. News reports have stated Bebe plans to close physical store locations and concentrate on its online sales, according to KBRA, but no formal closings have been announced. (KBRa accounted for the potential departure in its analysis, the agency stated).

The 6th largest loan, The Davenport in Cambridge, Mass., is to be entirely leased by a company called HubSpot which reported an operating loss of $44.7 million last year. But the company has a market cap of $2.4 billion.

But KBRA also noted the diversity of the collateral: more than 30% of the properties in the transaction are office buildings, with 21.5% retail and another 19.6% lodging.

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