A recently issued commercial mortgage-backed securitization gained a wave of attention earlier this year for its unique structure and is showing signs that it might be the start of the nation’s cleanup of bad commercial debt.
Rialto Capital Management’s CMBS, titled Rialto Capital, 2012-LT1, is a $132 million securitization made up of mostly nonperforming loans pooled from hotels, offices and retail properties in the Rialto real estate portfolio. JP Morgan (JPM) brought the deal to market on behalf of Rialto in March.
According the deal's first remittance report, analysts at Trepp say, about $12 million in loans were resolved in its first month of issuance, taking the balance of the bonds down to $120 million. The average life on the deal at its base case is just under a year. Trepp says if the pace of resolutions matches the pace in April, the actual average life could turn out to be much shorter.
“Since the market believes this might be the next big thing, we were eager to see how quickly the underlying loans and properties could be resolved,” analysts say.
However, some say the quick pace of resolutions was expected.
“My expectation is that the first three or four months would be exceptionally fast and then it would kind of level off from there because you’re going to hit all the low hanging fruit,” says Rodney Carey, chief executive of Woodward Asset Capital. “Right now you’ve got this big box of loans that are in the pool, and you’re going to start with the easiest ones, the one that you are going to get resolved the quickest so that they don’t run off someplace else.”
Under question is whether the assumptions that Rialto made for the deal in terms of the monthly resolutions match the $12 million figure. Rialto and its parent, homebuilder Lennar (LEN), were not immediately available for comment.
“If they were wrong on there assumptions, that could have some negative impacts not just on this particular transaction, but also on the overall industry getting momentum behind other deals,” Carey says. “If the market thinks these people still can’t gauge how quickly this is going to go, then they’re not going to trust investing into it.”
The deal is comprised of a single class of bonds, rated BBB- by Fitch Ratings and Baa3 by Moody's carrying a 4.75% coupon at 99.75 cents on the dollar.
Analyst such as Moody’s Investors Service (MCO) Joseph Baksic say the new Rialto CMBS is a single component of the overall cleanup process of the $75 to $100 billion of distressed commercial debt that occupies banks’ books today.
“It’s taken a lot of years to get to this point about using securitization as a potential way to help clean up some of these nonperforming loans out there,” Baksic says. “I think it’s a piece of the puzzle. The indications we have are that there may be more of these to come.”
Check out the June issue of HousingWire magazine — out toward the end of May — for a macro and microeconomic analysis of Rialto Capital, 2012-LT1, the “Old School CMBS.”