Kroll Bond Rating Agency (KBRA) has assigned preliminary ratings to VFC Series 2015-3, a $233.1m commercial non-performing loan (NPL) securitization of 361 NPL, performing loans, and real-estate-owned (REO) properties.
Sponsor First City Financial Corporation acquired the assets, a mix 237 NPLs, 116 performing loans and 8 REO properties, for $150.3m. First City has structured the securities as a liquidation vehicle that monetizes recoveries from the assets to pay the rated notes.
Among key credit considerations, the securitization carries an uncommon conflict of interest — spare the previous VFC 2014-2 transaction — in that the seller, sponsor, issuer, and asset manager are all related entities, KBRA noted in a pre-sale report.
“While it is typical in commercial NPL transactions for these entities to be related parties, there is usually an independent third party that acts as the cash management servicer,” analysts wrote in the report.
“In this transaction, there is no independent cash management servicer; instead, the servicer will perform the duties of cash management servicer. This introduces additional conflicts of interest that have not been present in other commercial NPL transactions rated by KBRA.”
In other NPL transactions, if the cash management servicer determines that there has been a breach or documentation defect adversely affecting the value of the asset or interests, the seller is required to repurchase the affected asset. But in this transaction the asset manager determines whether the breach or defect is material and whether the seller, a related entity of the asset manager, has a repurchase obligation.
But, KBRA noted: “The assets in this transaction represent approximately 22.4% of the company’s current servicing portfolio, which has an [unpaid principal balance] of $1.1bn. This provides a strong incentive for the asset manager to maximize recoveries on the assets. In addition, the asset manager must adhere to a servicing standard that requires it to act in the best interest of the noteholders.”
The servicer also has a proven track record and, although the transaction is designed as a liquidating trust structure for non-performing assets, KBRA’s analysis determined that 43% of the pool is performing.
The underlying collateral is comprised commercial real estate properties (85.7% of acquisition basis), land (9.9%), other non-real estate collateral (2.9%), and residential assets (1.6%). The top three state exposures are Texas (14.2%), California (10.7%), and Florida (8.6%).