CMBS market participants are breathing a sigh of relief as fully-complaint risk retention deals are being well received in the market. Whereas industry pros were concerned that the effects of the rules would make CMBS loans uncompetitive, the reverse is occurring, at least right now.
The most recent CMBS deals that priced at very tight levels (see our 2.3.17 article) successfully utilized two of the three possible structures to meet risk-retention rules. In the Citigroup/Deutsche Bank CMBS deal, the transaction benefitted from its use of the L-shape option under risk-retention rules. Citi and Deutsche are retaining a “vertical strip” equal to 1.9% of each class. And a KKR fund is taking down a “horizontal strip” made up of approximately 3.1% of a below-investment grade portion, which it must effectively hold for the deal’s ten-year life. In the second transaction, Wells, Morgan Stanley and Bank of America divided and retained a 5% vertical strip in proportion to their collateral contributions. The third possible structure, not yet utilized under risk-retention rules in 2017, is a b-buyer taking down the entire “horizontal strip,” made up of 5% of the most junior portion of the deal that it must effectively hold for the deal’s ten-year life.
On the two most recent deals, in addition to good market supply/demand characteristics, investment grade CMBS buyers were positive on having investors with “skin in the game” and were willing to pay up a bit for that. In addition, concern does not appear to be materializing that b-buyers would require significant additional yield for being forced to hold b-pieces for ten years and/or being forced to buy CMBS further up the capital stack than desired.