Reuters IFR: Deutsche Bank launches US$609m large-loan CMBS; Also recap of GSMS GC5

NEW YORK, Sept 28 (IFR) -  Sole book-runner and lead manager Deutsche Bank is marketing a US$609.1m commercial mortgage-backed security this week backed by seven large floating-rate loans for 52 commercial real estate (CRE) properties.

The transaction, dubbed COMM 2011-FL1, was announced today and is expected to price sometime next week.

The collateral is comprised of 80% hotel and 20% "mixed use" properties, which could be a combination of both office and retail loans.

The largest loan backing the transaction is a US$225m loan for the Hotel del Coronado, a 757-room luxury hotel occupying1.5 miles of beachfront property located just west of downtown San Diego.

The second largest loan in the pool, at US$113m, is for The Standard Hotel in downtown Manhattan, which opened in 2008. The 18-story, 337-room hotel is in the trendy Meatpacking District and straddles the High Line, an unused elevated rail structure located on Manhattan's west side that has been transformed to a 1.5 mile long pedestrian walkway.

The industry refers to this type of offering as a "large-loan" CMBS, because it comprises fewer, larger loans, and hence offers less diversification than the typical so-called "conduit" CMBS, which consists of many more CRE loans, typically culled from a broader range of geographical areas.

Even during less volatile times, therefore, rating agencies have demanded more credit enhancement to protect the Triple A slices of large-loan CMBS, compared to their conduit CMBS counterparts. Less diversification means that a delinquency on one loan can have a more devastating effect on a transaction's performance, so rating agencies rate large-loans more conservatively.

That trend is even more exaggerated now, given the current global volatility that has recently driven issuers to offer risk-averse investors spread concessions in order to appease them and get deals done.

The COMM 2011-FL1 deal, for instance, is structured with a whopping 41.5% credit enhancement supporting the US$356.295m Triple A rated piece. That's even more conservative then the 30% credit enhancement that has become a recent requirement on conduit offerings.

Moody's, Fitch, and Kroll rated the transaction.

"The rating agencies have always required more subordination for large-loan CMBS, and given recent global volatility, I expect that they will require even more subordination now," said Marc Peterson, a senior CMBS portfolio manager at Principal Global Investors in Des Moines, Iowa. "I expect that this volatility will keep commercial real estate originations slow for the remainder of the year."

The advantage of a large-loan CMBS pool is that investors can more easily conduct due diligence on the underlying properties. Given how well known some of the hotel properties are, some investors view the COMM 2011-FL1 loans as relatively low-leverage and high quality.

Additionally, some buy-siders view a floating-rate, short-duration CMBS as an attractive alternative to the typical fixed-rate, longer-maturity conduits that have been more common in the market, according to securitization specialists.

Only a handful of deals are expected for the remainder of the year, according to market participants.
A conduit from Wells Fargo and Royal Bank of Scotland is likely to surface soon, as well as the second standalone deal from Cantor Fitzgerald.

A fourth-quarter CMBS from Deutsche Bank and UBS is expected as well.

GOOD DEMAND FOR SENIOR BONDS ONLY

Last week, co-lead managers and joint bookrunners Goldman Sachs and Citigroup revived and restructured a US CMBS conduit that the banks had originally pulled from the market, post-pricing, in late July. The deal was withdrawn after an S&P ratings glitch hit the CMBS market.

Some loans from the original offering were dropped and different ones were added, ultimately increasing the size of the new deal, GSMS 2011-GC5, to US$1.75bn from the original US$1.5bn. The July conduit was dubbed GSMS 2011-GC4.

Spreads on several Triple A tranches of the reconstituted offering tightened at pricing last Thursday. For example, the 9.55-year Triple A piece printed 15bp inside guidance at swaps plus 170bp.

In fact, the equivalent tranche of GC4 priced slightly wider at swaps plus 175bp on July 22 – although that deal featured 20% credit enhancement protecting the Triple As, whereas GC5 boasted the now-standard 30% protection.

The snug pricing illustrated investors’ increasing demand for the Triple A part of the sector. CMBS fell out of favor in August amid an aversion to spread product due to uncertainty surrounding the European debt crisis and S&P's downgrade of the US sovereign credit rating.

But issuers have had to offer a whole new paradigm -- referred to by some as "CMBS 3.0" --  to attract investors back to the asset class. CMBS 2.0 was the moniker given to the new breed of deals issued as the US CMBS market revived after the 2008 financial crisis.

In addition to the apparently bulletproof 30% Triple A credit enhancement, GC5 was also segregated into publicly and privately offered securities. This new structural template, designed to appease risk-averse investors, started with the Deutsche Bank/UBS US$1.3bn DBUBS 2011-LC3 transaction, which was priced on August 11.

The increased credit enhancement in the new format and the publicly registered classes have opened the securities to a much larger account base. All previous so-called CMBS 2.0 offerings were issued in the private market.

"Judging from the market’s demand for the new 30% Triple A public paper, we think this structure is here to stay and will hopefully become the standard for what we have been calling CMBS 3.0," wrote Harris Trifon, head of CMBS research at Deutsche Bank, in a recent article.

A majority of the collateral in GC5 was originally scheduled to be included in GC4. That deal was scuppered when S&P's shocking July 27 criteria review sent the CMBS market into a tailspin. It led the firm to withdraw ratings on two deals and suspend the assignment of all new-issue CMBS ratings. A grim global economic outlook compounded the uncertainty in the market, causing a third deal to be pulled from the new-issue market in August.

S&P's ratings review occurred because it discovered its new-issue ratings and surveillance teams used "conflicting methods" of determining debt service coverage ratios for rating CMBS deals.

Even before S&P's announcement, the beleaguered GSMS 2011-GC4 offering was controversial as investors lobbied the arrangers to increase the credit enhancement to 20% from the paltry initial layer of 14.5%. They got their wish, but it made no difference after the deal was pulled.

However, S&P staged a drastic U-turn several days later, saying that based on an initial criteria review, it would resume assigning ratings to new conduit/fusion CMBS transactions. It also found that its ratings teams actually used consistent methods.

Still, Goldman and Citigroup, not surprisingly, did not hire S&P to rate last week's current transaction. Fitch, Moody's and Morningstar rated it.

Lower-rated portions of deals have not fared as well. A US$243.2m privately placed portion of a larger JP Morgan CMBS conduit that surfaced in mid-September is still struggling to sell, despite the fact that the arrangers have revised price guidance wider two times.

adam.tempkin@thomsonreuters.com