KBRA Releases CRE CLO Ramp-Up: From Beginning to End With More of the Same … So Far

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) releases its CRE CLO Ramp-Up: From
Beginning to End With More of the Same … So Far research report, which
analyzes commercial real estate collateralized loan obligation (CRE CLO)
ramp-up mechanics, provisions and trends observed in KBRA-rated
transactions.

Ramp-up allows transaction sponsors to issue CRE CLOs, whereby the
aggregate dollar balance of the liability structure exceeds the total
balance of the mortgage collateral as of the closing date. The
collateral manager can utilize the unused proceeds to acquire previously
unidentified mortgage assets, which increases the efficiency of the CRE
CLO, as the fixed costs associated with the creation, issuance, and
maintenance of the vehicle can be spread over a larger transaction.

The ramp-up feature has become fairly common among managed CRE CLOs over
the past 18 months. A breakdown of the 18 managed CRE CLOs rated by KBRA
since 2017 shows that 11 have incorporated ramp-up provisions, including
seven of the last nine transactions. In addition, ramp-up has been
substantial across the 11 transactions, accounting for $1.1 billion
(16.2%) of the $6.7 billion in issuance. While some of the transactions
are in their ramp-up period or still waiting to settle, we have observed
over $685.3 million of aggregate ramp-up assets being acquired.

Generally, ramp-up assets have so far had credit characteristics that
were consistent with the initial pool. In the transactions that have
completed their ramp-up periods, deal weighted average credit metrics
have not meaningfully changed between issuance and ramp-up: KBRA
loan-to-values (KLTVs) have not changed by more than 1.5%, KBRA debt
yield (KDY) has generally stayed rangebound between one-tenth and
two-tenths of a percent, and KBRA cap rates have moved less than 0.15%.
Not surprisingly, concentration—as indicated by loan Herfindahl Index
(HERF)—has increased with the addition of new loans and, consistent with
what we see happening with CRE CLO issuance trends, average loan spread
compressed in all the deals after ramp-up.

To view the report, click here.

Related Publications: (available at www.kbra.com)

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About KBRA and KBRA Europe

KBRA is a full-service credit rating agency registered with the U.S.
Securities and Exchange Commission as an NRSRO. In addition, KBRA is
designated as a designated rating organization by the Ontario Securities
Commission for issuers of asset-backed securities to file a short form
prospectus or shelf prospectus. KBRA is also recognized by the National
Association of Insurance Commissioners as a Credit Rating Provider, and
is a certified Credit Rating Agency (CRA) by the European Securities and
Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is
registered with ESMA as a CRA.

Contacts

Analytical Contacts:
Roy Chun,
Managing Director
(646) 731-2376
rchun@kbra.com

Nitin
Bhasin, CFA, Senior Managing Director
(646) 731-2334
nbhasin@kbra.com

Eric
Thompson, Senior Managing Director
(646) 731-2355
ethompson@kbra.com