A consortium of lenders including Deutsche Bank, Citi Real Estate Funding, Barclays Capital Real Estate, Bank of Montreal and Goldman Sachs Mortgage Company has launched the first five-year commercial mortgage-backed securities conduit deal.
The pool has an aggregate principal balance of $765 million, comprising 26 loans secured by 43 commercial properties across a variety of regions in the US and comes at a time when borrowers are unwilling to lock in fixed interest rates for the 10-year term usually associated with conduit deals. Since all loans are fixed-rate mortgages, neither the assets nor the rated notes have Libor or SOFR exposure.
“This is the first fixed-rate conduit transaction that’s been entirely five-year loans,” said Eric Rothfeld, managing director and the researcher of the deal’s presale report at the New York-based Fitch Ratings, adding that the transaction has lower leverage than previous 10-year deals. “The driver behind this transaction was certainly the interest rate environment, with sponsors looking for shorter-term financing.”
Manus Clancy, senior managing director at New York based data provider Trepp, said many borrowers did not want to take out a 10-year fixed rate conduit loan because of prepayment restrictions. A five-year CMBS allows borrowers to avoid the risk of being locked in high rates for a long time. “Maybe that five-year loan with a four- or five-month open period at the end of it becomes the bridge that fills that [refinancing] needs,” he added.
Here to stay?
One thing to watch, however, is whether the fixed-rate short-term conduit loans will be a long-term fixture in the market or if they are a temporary response mechanism reacting to a high interest rates environment.
“[The conduit lenders have] tried this before. It was a long, long time ago. It didn’t really stick. We’re in a new regime now where people have been burned by floating-rate debt. So maybe this time, the conditions are more favorable for it,” said Clancy. “If it could be enduring, it would allow the CMBS conduit market to take market share and compete better with banks.”
He continued: “I think it comes down to economics. Is this something that issuers can make profitable over and over again? I think time will tell.”
One interesting factor about the deal is its relatively low leverage. As tracked by Fitch Ratings in the deal’s presale report, the conduit loan has a 90 percent loan-to-value ratio, which is lower than the average LTV in 2022 of 99.3 percent, and 2021 at 103.3 percent. However, the pool’s debt service coverage ratio (DSCR) is 1.16x, which is also lower than the previous two years and driven in large part by a higher average mortgage rate.
Fitch’s Rothfeld noted there could still be refinancing concerns at maturity. “These loans do have to refinance in five years, and depending on where rates are at the time, it could create a more stressful or a less stressful refinance scenario,” Rothfeld said, noting that the refinancing situation of the fixed-rate five-year loans is still hard to forecast now.
Real Estate Capital USA will follow up with the transaction.