Rialto Capital has agreed to buy the subordinate portion of the first commercial MBS deal that will be structured to comply with impending risk-retention rules, according to Commercial Mortgage Alert. The roughly $800-million offering is scheduled to hit the market this month. It will be backed by loans contributed by Wells Fargo, Bank of America and Morgan Stanley. The three banks, which will also underwrite the offering, will retain 5% of each class, known as a “vertical strip.” Originally, it was expected that Wells would retain the entire strip itself. But the word now is that each bank will retain a share proportional to its loan contribution.
Rialto will buy the remaining 95% of each below-investment-grade class. Rialto’s purchase price translates into a 17.75% pre-loss yield. The transaction will have relatively low leverage with a weighted average loan-to-value ratio of 57%-59%.
The risk-retention rules don’t take effect until Christmas Eve 2016, but the banks are testing the structure now to get an indication from regulators about how much capital must be held in reserve against the retained bonds. The banks are hoping that the retained vertical strips will qualify for treatment as loan participations, rather than as bonds, because such debt has lower set-aside requirements.