Canadian Pension Plan Investment Board and Metropolitan Life have acquired $475m of mezzanine debt as part of a refinancing of five Kyo-ya Hotels & Resorts in Hawaii and California.
CPPIB through its CPPIB Credit Investments II vehicle has bought a $300m junior mezzanine (B) loan at Libor plus 6.6% secured on the hotels, while MetLife invested in a $175m senior mezzanine (A) loan with a Libor plus 4.5% interest rate.
The Hawaiian hotels – Sheraton Waikiki, Sheraton Maui Resort & Spa, Westin Moana Surfrider and The Royal Hawaiian – and The Palace Hotel (San Francisco) have a combined 4,016 rooms.
The hotels were refinanced by Deutsche Bank via its New York-based German American Capital Corporation subsidiary. GACC was the originator and mortgage loan seller, while the Japanese Kyo-ya Hotels & Resorts is the borrower. A two-year, floating-rate loan with three one-year extension options, secured by the fee and/or leasehold interests in the full-service hotels was securitised as COMM 2014-KYO and, in addition to the first mortgage loan, GACC originated the two mezzanine loans on the deal.
Deutsche Bank priced the $551m top slice of the seven-tranche $1.4bn CMBS deal at Libor plus 90 basis points, with S&P and Morningstar rating it AAA. The quality and location of the properties, positive operating trends and strong Hawaiian tourism were among the strengths listed by the agencies in presale reports. The hotels operate under three different Starwood-affiliated brands: Westin, Sheraton, and The Luxury Collection.
The issue is the second refinancing of the portfolio in just over a year; in 2013 Goldman Sachs issued a $1.1bn CMBS, GSMS 2013-KYO, backed by most of the same collateral.
In an unsolicited commentary on the latest deal, Fitch said that the top tranche rating was consistent with its own AAA rating, but that it “likely” would have assigned subordinate ratings to subordinate tranches, because of the $300m of additional debt that has been tacked on, even though 1,142-room Sheraton Princess Kaiulani, the weakest property in the GSMS 2013-KYO pool, does not feature in the current issue.
“The increase in total debt and the reduction in supporting collateral should give investors pause,” the Fitch report stated, calling the additional debt part of a “troubling trend” among US CMBS lenders.
Fitch's maximum leverage for a 'B-' rating is 80.5% which would allow $1.159bn of debt, and a spokesperson would elaborate only by saying that the LTV on $1.4bn would be materially higher.
S&P acknowledged that at an 82.6% LTV based on its valuation, the loan is “highly leveraged” and “higher than most single-borrower transactions we have rated recently.” With the mezzanine debt, the LTV increases to 110.6%.
“We are aware of the risks Fitch highlighted and factored them into our analysis, but disagree with their conclusions,” a spokesperson for S&P said. “There have been numerous occasions where we believed that the risks were greater than our competitors did but we think the market benefits from a diversity of opinions on credit risk.”