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Rialto latest NPL deal structure means riskier assets

Transaction includes 710 distinct pieces of collateral

dollar zoomed in

Rialto Capital Management, which built a reputation for its unique deal structures, is back in the commercial debt sector, planning its fourth nonperforming loan securitization transaction.

Rialto’s latest commercial mortgage-backed securitization, titled COMM 2013-RIAL4, is a $208.7 million made up 515 nonperforming loans and real-estate owned properties. Rialto Real Estate Fund II and German American Capital Corporation acquired the assets.

Many of the assets are collateralized by multiple pieces of real estate, totaling 710 pieces of collateral.

The pending transaction is slated to receive ‘BBB’ ratings from Kroll Bond Ratings due to various concerns, including the transaction structure and limiting information regarding the assets.

The transaction structure allows the cash to leak below the rated class, which means that if there isn’t material stress early in the deal’s life, the leakage triggers will be satisfied and a significant amount of cash may lead below the rating.

Consequently, this many lead to adverse selection in which the better quality assets are resolved earlier in the transactions life, leaving the other note holders exposed to riskier assets toward the end of the deal.

The limited knowledge behind the assets comes as a result of the sellers acquiring assets from unaffiliated parties in 16 separate transactions from 2010 to 2013.

In connection with these acquisitions, incomplete loan files were received from the related sellers, contributing to lower and non-uniform information quality and availability relative to similar transactions that contain newly originated collateral.

“Information about the loans and commercial properties will not be as uniform or as frequently available as information typically required with respect to the Commercial Real Estate Finance Counsel Investor Reporting Package that is provided in performing CMBS conduit securitizations,” Kroll analysts explained.

However, it’s important to note that although this transaction is designed to liquidate trust structure for nonperforming assets, more than 60% of the pool is performing — the highest among any nonperforming loan transaction rated this year.

This is critical because performing assets produce cash flow and there is a significant likelihood that there may be additional recoveries of their unpaid principal balance than nonperforming loans and REO assets.

It is worth pointing out that more than 80% of the performing assets in this pool have either been previously modified and/or are performing matured balloons.

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