JPMorgan Chase’s upcoming $716.3-million CMBS issue, the second conduit package to go on the market this year, is getting high marks from ratings agencies despite risks attached to some of the underlying loans. There will be more such conduit deals as 2010 progresses, according to the CRE Finance Council, provided transaction volume picks up.
“A big part of seeing new CMBS issues is going to be more properties trading hands and those that are maturing getting refinanced,” Pat Sargent, president of the CRE Finance Council, told GlobeSt.com. “We’re starting to see that, but because of the valuation drops, you’re going to have to have new equity in a number of cases.”
Sargent said it’s encouraging that a conduit sale of this magnitude, as opposed to the three single-borrower CMBS deals that occurred late last year, is going forward. It’s more than twice the size of the $309.7-million issue from the Royal Bank of Scotland in April — the first such multi-borrower deal in nearly two years. “We see this as a positive return to capital market execution,” he said.
Known as JPMCC 2010-C1, the deal is backed by 36 fixed-rate commercial mortgage loans secured by 96 properties in a variety of asset classes across 31 states. Largest of the loans is on Gateway Center, a 623,972-square-foot lifestyle center in Salt Lake City, UT with $101.1 million in debt. Loans held by JPMorgan Chase Bank comprise 78.4% of the pool with the remainder originated by Ladder Capital Finance.
According to a presale report from Moody’s Investors Service, the pool has a weighted average loan-to-value ratio (LTV) of 80.4% and a debt-service coverage ratio of 1.56X. Similarly, Fitch Ratings said in its presale report that the 78.2% LTV and 1.37X DSCR it assigns to the pool compares favorably with the average 110.7% LVT and 1.05X ratio across Fitch-rated conduit transactions from 2007 and 2008.
“That reflects a return by loan originators to prudent underwriting,” said Sargent. Both Moody’s and Fitch have assigned their top ratings of AAA to $608.9 million of the loans. Among other strengths, the loans in the pool are geographically diverse and tend to be backed by properties with strong tenancies.
However, the agencies do note risks along with the positives. Moody’s said about 71% of the pool balance is exposed to a single property type: anchored retail, although anchored retail is seen by the agency as a “less risky” asset class. “Property type concentrations increase asset correlations, which affect pool default and loss distributions,” Moody’s said in its presale report.
Fitch also sees the heavy retail concentration as a liability, but for a different reason: The agency maintains a “negative” outlook for the sector. A JPMorgan spokesman said the company has no comment on the agencies’ reports.
The conduit sale, which reportedly is expected to price in mid-June, comes as CMBS has been outperforming other forms of debt when it comes to yields. Citing Barclays data, Bloomberg reported that top-rated CMBS yielded about 309 basis points more than Treasuries as of June 4.