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Thursday, 12 April 2018

KKR Tops Among CMBS Risk Retainers in 1Q

KKR & Co. was, by far, the most dominant player in the CMBS risk-retention business during the first quarter. The investment manager acquired bonds with a face value of $265.81 million, comprising the horizontal risk-retention classes of three conduit deals totaling $2.9 billion. No other risk retainer even came close to its volume during the period.

Commercial Real Estate Direct Staff Report

KKR & Co. was, by far, the most dominant player in the CMBS risk-retention business during the first quarter.

The investment manager, which last year took its real estate credit business public through KKR Real Estate Finance Trust, acquired bonds with a face value of $265.81 million, comprising the horizontal risk-retention classes of three conduit deals totaling $2.9 billion.

It shared risk-retention responsibilities on one of those deals, Wells Fargo Commercial Mortgage Trust, 2018-C43, with Barclays Capital, which retained a 2 percent vertical slice of the deal, which had a hybrid, or L-shaped, risk-retention scheme. KKR retained a 6.84 percent horizontal slice.

Only Oaktree Capital Management invested in as many deals as KKR did during the quarter. Its investments also involved horizontal slices, but only of single-borrower transactions. Because those deals tended to be smaller than the conduits in which KKR invested, its volume totaled only $44.75 million.

The risk-retention rules, which went into effect in late 2016, require an issuer to keep a 5 percent risk piece of any structured transaction. It could keep a vertical slice equal to 5 percent of a deal's par value, or carve out a 5 percent horizontal slice, by market value, and sell it to an investor that would be required to keep it for at least five years. It also could structure a deal with both vertical and horizontal risk-retention slices.

KKR bought bonds with a face value of $265.81 million, or 9.3 percent of the balance of the three deals they were from. But it paid $129.43 million, or 48.7 percent of par.

Most-Active Retainers of CMBS Risk - 1Q2018

 

Vert #

Amt $mln

Hor #

Amt $mln

Total #

Amt $mln

KKR & Co.

-

-

3

265.81

3

265.81

Barings

-

-

1

146.93

1

146.93

Rialto Capital Management

   

2

123.55

2

123.55

Prima Capital

-

-

2

79.79

2

79.79

Barclays Capital

2

76.42

-

-

2

76.42

Western Asset Management Co.

-

-

1

67.77

1

67.77

JPMorgan Chase Bank

2

57.42

-

-

2

57.42

Eightfold Real Estate Capital

   

1

54.94

1

54.94

Natixis

6

49.65

   

6

49.65

Oaktree Capital Management

   

3

44.75

3

44.75

Goldman Sachs

2

44.56

   

2

44.56

Deutsche Bank

1

40.47

   

1

40.47

Citi

2

25.32

   

2

25.32

Brookfield Asset Management

   

1

23.99

1

23.99

Waterfall Asset Management

   

1

20.20

1

20.20

Shelter Growth Capital

   

1

19.99

1

19.99

Franklin CMBS (KSL Capital)

   

1

15.03

1

15.03

Morgan Stanley

1

14.97

   

1

14.97

Sutherland Asset Management

   

1

14.34

1

14.34

Starwood Property Trust

1

11.59

   

1

11.59

Bank of America

1

10.70

   

1

10.70

Barings and Rialto Capital Management were well behind KKR in terms of acquisitions volume. Barings took down the horizontal risk-retention slice of a $1.5 billion conduit, Benchmark Mortgage Trust, 2018-B2, while Rialto invested in two deals. Its investment allowed the $830.9 million UBS Commercial Mortgage Trust, 2018-C9, conduit transaction to comply with the risk-retention rules. And it shares risk-retention responsibilities on another conduit, GS Mortgage Securities Corp., 2018-GS9, with Goldman Sachs, which took down a 3.4 percent vertical slice of the deal.

CMBS Risk-Retention Structures 1Q2018

 

Conduit

Single Borrower

 

# Deals

Bal $mln

%

#Deals

Bal $mln

%

Vertical

2

2,349.53

24.42

11

4,303.05

44.75

Horizontal

4

4,484.62

46.61

10

5,312.00

55.25

Hybrid

3

2,786.96

28.97

0

0

0

TOTAL

9

9,621.11

 

21

9,615.05

 

Only two of the nine conduit deals that priced during the quarter were structured with vertical risk-retention schemes; three had hybrid schemes, and four had horizontal schemes. Buyers of horizontal slices have priced their tranches to yield anywhere from 13.08 percent to 19.77 percent, depending on how high up the capital stack their investments went.

Barings, for instance, paid 52.33 percent of par for the $146.93 million of bonds, or 9.75 percent of the most junior bonds, it bought from the BMARK 2018-B2 deal, to yield 13.08 percent. And Eightfold Real Estate Capital paid 33.82 percent of par for the $54.94 million, or 4.71 percent, of the bonds in the BMARK 2018-B1 deal, to yield 19.77 percent.

On the single-borrower deal side, the split was more even, with 11 vertical and 10 horizontal structures.

CMBS B-Piece Buyers 1Q2018

 

#Deals

Bal $mln

Mkt Shr%

#Deals

Bal $mln

Mkt
Shr%

KKR Real Estate

3

2,871.16

29.84

1

1,327.48

15.22

Rialto Asset Management

2

1,727.03

17.95

3

3,005.84

34.47

Barings

1

1,507.01

15.66

1

1,043.45

11.97

Torchlight Investors

1

1,287.15

13.38

   

-

Eightfold Real Estate Capital

1

1,166.38

12.12

   

-

LNR Partners

1

1,062.38

11.04

1

1,092.98

12.54

Blackrock

-

-

-

1

977.09

11.21

C-III

-

-

-

1

637.56

7.31

Argentic

-

-

-

1

634.91

7.28

TOTAL

9

9,621.11

 

9

8,719.31

 

Not surprisingly, KKR was the most active B-piece buyer during the quarter, investing in three deals. Most, but not all B-piece buyers structured their investments to comply with deals' risk-retention requirements. Torchlight Investors, for instance, bought the B-piece, comprised of the most junior bonds classes, of one conduit deal, BANK, 2018-BN10. But the deal's risk-retention requirement was fulfilled by Wells Fargo Bank, which retained a 5 percent vertical slice. That means Torchlight isn't restricted from leveraging, selling off a piece or hedging against its investment.

Comments? E-mail Orest Mandzy, or call him at (267) 327-4281.


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