A new CMBS conduit transaction demonstrates how “credit bar-belling,” or using lower leverage investment grade (IG) loans to compensate for increases in riskier loans, continues among CMBS loan pools.
According to a new Kroll Bond Rating Agency (KBRA) pre-sale report, the Citigroup Commercial Mortgage Trust 2016-P3 (CGCMT 2016-P3), made up of 37 loans with an aggregate principal of $771 million, is less leveraged than many conduits the agency has recently rated.
“However, similar to many recent conduit transactions,” the report states, “the pool’s weighted average KLTV is skewed by one low leverage loan, 225 Liberty Street.”
In a separate report last September, the rating agency cited a striking, seven-fold increase in high leverage loans (or those with LTVs greater than 110 percent) in KBRA-rated conduits that also contained IG loans from 2012 to 2015.
The loan at 225 Liberty Street is an IG loan backed by a Class A property in the Financial District in Manhattan that brings the pool’s weighted average loan-to-value (LTV) ratio to 100 percent. But 54.0 percent of the pool’s cash flow is generated by loans with LTVs greater than 100 percent, while 21.7 percent of the pool’s cash flow is attributed to high leveraged loans with a LTV greater than 110 percent. Analyzed without the 225 Liberty Street loan, the pool’s average LTV jumps to 102.3 percent.
As Real Estate Capital reported previously, credit bar-belling is more likely to occur when IG loans are present because their positive credit attributes and higher LTVs offset the impact of weaker loans in LTV calculations.
Another concern noted in the pre-sale was that the percentage of loans in the pool (32.4%) with existing debt outside the trust–but on properties backing the trust–or ability to take on future debt burdens was higher than the average of conduits rated by the agency over the past six months.
“Additional financing increases risk to the trust by imposing a higher debt burden on borrowers, which in turn increases default and insolvency risk,” the report states.
The loan at 225 Liberty Street has existing debt outside the trust, or “subordinate debt,” of $441 million, while a loan on another Manhattan property at 5 Penn Plaza in Manhattan has existing subordinate debt in the form of mezzanine financing with an outstanding balance of $40 million.
Citigroup Global Markets Realty Corp the greatest number of loans in the pool with 11, or 23.8 percent. Natixis Real Estate Capital, Société Générale, Principal Commercial Capital, The Bank of New York Mellon, and Walker & Dunlop Commercial Property Funding I WF.
Over two-thirds of the loans were used to refinance existing debt, while proceeds from the remaining loans were used for property acquisition and recapitalization purposes. The pool has exposure to all the major property types, especially office, retail, hospitality and industrial, and has a high exposure in the New York market, including six Manhattan properties.
The pre-sale report states that the aggregate pool principal balance will reduce by 7.1 percent through the life of the transaction, due to the scheduled deleveraging that will occur from amortization, absent any defaults.
“This is lower than the scheduled deleveraging in any of the prior 21 CMBS conduits rated by KBRA,” states the report. “Loan deleveraging results in a reduced KLTV during the term, and a lower probability of default.”