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CMBS split loans on the rise
Pari-passu loans are increasing as a percentage of US conduit CMBS transactions. A recent Deutsche Bank analysis suggests that there are now 500 split loans in CMBS 2.0 deals and while split conduit loans can be of high quality, some investors prefer loan diversity over overlap.
Split loans can reduce diversification across a CMBS portfolio, particularly when individual portions of the loans often account for a big part of a transaction. Deutsche Bank CMBS analysts highlight that split loans make up 67% of the transaction with the largest split loan balance in the CMBS 2.0 universe - the US$975.4m CD 2016-CD2. In comparison, they make up 57% of the deal with the tenth largest balance - the US$820.6m GSMS 2015-GS1.
The analysis shows that the Miracle Mile Shops loan is the largest split loan in the CMBS 2.0 universe at US$580m. The average size of this split loan in a deal is 9.2% and it appears across six conduits.
The US$525m Hilton Hawaiian Village loan is the second largest split loan and features in the most conduits (eight), with the average size of the split loan in a deal standing at 7%. At the other end of the spectrum, the tenth largest split loan is the US$400m Bank of America Plaza, with an average size of 9.5% and featuring in four conduits.
The Deutsche Bank analysts note that "most investors care about overlap" in conduit deals and point out that the US$1bn GSMS 2017-GS5 and US$959.1m GSMS 2017-GS6 transactions feature the highest amount of overlap in CMBS 2.0, at 28.8%. The assets with most overlap in these transactions are the Lafayette Centre (with 7.8% deal overlap), followed by the US Industrial Portfolio (7%), the GSK R&D Centre (6.8%), the Ericsson North American HQ (4.8%) and the Pentagon Centre (2.4%).
The other top five conduits in terms of overlap are the US$800m DBJPM 2016-C3 and US$939m JPMCC 2016-JP2 transactions at 28.2% overlap. They are in joint-place with the US$973.7m DBJPM 2016-C6 and US$911m JPMCC 2017-JP7 deals, also at 28.2% overlap.
The US$1.1bn CGCMT 2015-GC35 and US$820.6m GSMS 2015-GS1 transactions have the fourth largest overlap at 27.7%, while the US$600m CSMC 2016-NXSR and US$757m WFCM 2016-NXS6 transactions have an 26% overlap.
The analysts point out that while the highest pairwise overlap is 28.8%, the average is around 13%, although many deals have much higher pairwise overlap. They add that loans may be split across singe-asset/single-borrower and conduit transactions or split only across conduits, with varying rationales behind the practice.
One reason is that splitting loans across transactions boosts conduit diversification because when a single loan is too large, it can reduce the overall diversity of the pool and negatively impact credit enhancement requirements, impacting investor demand. Additionally, loan splitting can improve credit metrics because pari-passu loans can limit concentrations of a given property type in a deal.
The approach of rating agencies can also have an impact because different rating agencies rate conduit and SASB deals and rating agency selection can impact how the loan is split between the two CMBS sectors. The analysts add that lenders can reduce their risk to a large loan by cutting and inserting it into multiple conduit deals and - as transactions remain below US$1bn - split loans seem to be the norm for the time being.
Finally, split loans can boost profitability metrics where a range of market conditions may affect whether a dealer chooses to execute more or less in SASB format. This decision can therefore be influenced by loan quality, diversity benefits, spread levels and deal costs.
The analysts conclude that split conduit loans can be high quality, but some investors prefer diversity over overlap and while they appeared in CMBS 1.0 deals, they were typically smaller as a percentage than in CMBS 2.0 transactions.
07/09/2017 15:37:39
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