In one of 2021’s final deals, Western Mortgage Reference Notes, Series 2021-CL2 issued $4.5 billion in credit-linked notes. The notes were also pegged to the Secured Overnight Financing Rate (SOFR).
After closing on Dec. 29 the transaction, known as WAL 2021-CL2, the transaction became the second from Western Alliance Bank, the deal’s issuer, and the bank’s second credit-linked note. J.P. Morgan Securities is the sole bookrunner on the transaction, a type of a derivative product, which will issue the notes through seven classes of notes.
A pool of 5,554 mortgage loans comprises the reference obligations, and were originated and serviced by various operators. They represent a balance of more than $4.5 billion as of Nov. 30, 2021, according to a presale report from Kroll Bond Rating Agency.
The $4.3 billion senior reference certificate is not rated, but the M-1 through the B classes are pegged to the SOFR. Ratings on the notes range form ‘A-’ through ‘B’. The rated notes, M-1 through B, have a slated maturity date of July 2059.
The WAL 2021-CL2 consists of prime borrowers on predominantly 30-year, fully amortizing, fixed-rate mortgages. KBRA notes that the loans were underwritten with fully documented income.
The underlying loans in the reference pool can be considered of generally high quality. Even among the non-QM loans, most of their characteristics fall in line with what is considered prime. They have a weighted average (WA) original credit score of 766, and a debt-to-income ratio of 33.5%. The reference pool is characterized by loans with low original loan-to-value ratios — averaging 68.1%. The known non-QM loans in the reference pool are also of generally high quality, with interest only periods, and debt-to-income ratios that exceed 43.0%, KBRA said.
The non-QM loans also have a WA original credit score of 759 and a WA debt-to-income ratio of 40.4%. In terms of borrower equity on the underlying properties, KBRA noted that those levels were “notable,” and were reflected in the WA original loan-to-value ratio of 64.6%.
While most characteristics about the referenced notes are strong, KBRA also pointed out a couple of potential credit weaknesses. About 18.1% of the reference obligations are investment property loans, KBRA said, a meaningful portion. Performance might depend on certain aspects of the property’s local rental market.
In another potential credit weakness, the mortgages in the reference pool are not geographically diversified. California, for instance, represents 64.4% of the reference pool’s loan balance, while Los Angeles is the accounts for the largest concentration by CBSA.
