Higher credit enhancement did not necessarily pay off for Wells Fargo in its latest commercial mortgage securitization.
The sponsor is paying interest of swaps plus 115 basis points on the 10-year senior AS tranche of its latest deal, the $711 million Wells Fargo Commercial Mortgage Trust 2015-LC20. The AS tranche benefits from subordination of 27%. That's higher than is typical for this tranche.
For example, Deutsche Bank priced its latest deal, COMM 2015-CCRE22 deal, last week. The A-M notes, which are the equivalent of AS notes, have only 24% subordination, yet pays the same spread, 115 basis points, over swaps.
If the higher level of subordination did not impress investors, it did not appear to impress Moody's Investors Service, either. The agency assigned an Aa1 rating to the tranche, one notch below the AAA assigned by both DBRS and Morningstar.
Split ratings have become common on senior tranches, and Moody's is typically the dissenting opinion. These tranches are not quite as safe as super senior tranches because they benefit from less subordination. But in the past they were nevertheless uniformly assigned the same triple-A ratings as super senior tranches.
In the case of Wells Fargo's latest conduit, the concern may have been an unusually heavy concentration of loans secured by buildings with a single tenant. Of the 68 loans backing the deal, 18 (21% of the pool) are secured by properties that are fully leased to single tenants. They include three of the 10 biggest loans in the pool.
The loans, sponsored by Ladder Capital Finance, Wells Fargo and Silverpeak Real Estate Finance, are collectively secured by 122 multifamily and other kinds of commercial properties.
Loans secured by properties occupied by single tenants are at risk of higher loss severities in the event of default. Morningstar said in the presale report that "it is somewhat atypical to see the largest loan in the pool secured by a single tenant (albeit multiple locations)."
However, the single-tenant buildings have some high-quality tenants, including Hanesbrands, Walgreens and Dollar General. In most cases the tenants have leases that extend beyond the maturities of the loans on the buildings, according to DBRS.
Ladder Capital's Walgreens Portfolio, the second-largest loan in the pool, includes 29 Walgreens located in 12 states. The properties are all 100% occupied on long-term leases that extend more than four years past loan maturity. The second-largest single-tenant loan is secured by a portfolio of eight properties leased to DS Services of America, Inc. on leases that expire in 2034, nearly 10 years past loan maturity.
Some issuers have responded to Moody's rating on all but the super senior tranches. Deutsche Bank, for example, only hired Moody's to rate the super senior tranche of COMM 2015-CCRE22.
At the super senior level, Wells Fargo priced the 10-year, benchmark bond at swaps plus 87 basis points. By comparison Deutsche Bank priced the super senior 10-year note one basis point tighter. In both cases, the super senior notes have credit enhancement of 30%.