Wells Fargo’s next commercial mortgage securitization pools a smaller concentration of larger loans but also has more exposure to single-tenant properties.
The $875.1 million Wells Fargo Commercial Mortgage Trust 2016-NXS5 is the sponsor’s first such deal of pass-through certificates since November of last year.
The trust will issue 21 classes of notes, including $612.6 million in nine “super-senior” notes rated ‘AAA’ by Fitch that enjoy 30% credit enhancement – meaning they are protected for up to a 30% loss in the portfolio. There is also “junior AAA” rated tranche with a CE of only 24.25%.
The subordinated Class A-S triple-A notes are considered thinner that what Fitch normally expects in a transaction.
The deal’s junior-AAA notes’ tranche size of $50.3 million is only 1.12x of Fitch’s base case expected loss (Fitch would prefer 2.0x to 3.0x).
Other subordinated tranches include interest-only certificate holdings, as well as notes that were privately placed.
Underwriters on the deal are Wells Fargo, Natixis and Citigroup.
In its presale report, Fitch notes that the 10 largest loans account for just 48.1% of the collateral pool, leaving investors better protected against asset or sponsor concentrations that could require subordinated notes to be added to the pool. The average loan size is $13.7 million compared to the $12.5 million in Wells Fargo’s last pass-through certificates offering last November.
The market average of top 10 loan concentrations in Fitch-rated ABS portfolios is 55.7% year-to-date, the ratings agency stated.
As with Well’s 2015-NXS4 deal, there are no investment-grade loans in the portfolio.
But Fitch notes the transaction has higher leverage than other deals it has rated recently. Some of the riskier metrics include the lower-than-average debt-service coverage ratio of 1.12x (compared to deal marks of 1.18x and 1.19x for each of the past two years) as well as a higher loan-to-value ratio (110.6%) compared to previous averages of 109.3% in 2015 and 106.2% in 2014 for Fitch-rated CMBS portfolios.
Another ratings concern was the higher concentration of properties with a single tenant. The pool has nine loans deals (about 19.4% of balance) secured by properties occupied by a single tenant, but when including 33 properties that have at least a 75% exposure to a single tenant, the ratio is bumped to 33.4% of the pool. That is “significantly higher” than the average 12.8% exposure to single tenant in 2015 CMBS deals rated by Fitch.
The properties are geographically dispersed, with concentrations in the Mideast (27.5% of the pool) and Great Lakes area (21.9%).