Bankers prep first US home-rental cashflow ABS -sources

Reuters

By Adam Tempkin

NEW YORK, Oct 22 (IFR) - The first-ever bond backed byhome-rental cashflows, a US$300 million trade from privateequity giant Blackstone, will begin pre-marketing withintwo weeks, sources close to the deal said on Tuesday.

The asset-backed security is expected to have creditratings from Kroll, Morningstar, and Moody's, they said.

Lead underwriter Deutsche Bank has worked for nearly a yearon developing the transaction with Blackstone, which owns morethan US$6 billion in distressed properties across the US.

With a nascent recovery in home prices, REO-to-rental - therenting out of foreclosed single family homes that werepurchased at rock-bottom prices - has become big business.

The sector has attracted investments from private equityfirms, REITs and others over the last two years.

Deutsche Bank declined to comment. Blackstone was notimmediately available to comment.

Asset managers buying up distressed single-family homes enmasse have typically tapped equity investments and warehousefinancing from investment banks to fund themselves.

But tapping the capital markets via a securitization isviewed as the final step in securing low-cost funding for suchpurchases, and will likely open up a whole new asset class,securitization experts say.

Over the past two years, S&P, Moody's, Fitch, Morningstar,DBRS, and Kroll have all devoted resources to analyzing thesector and building methodologies.

However, only Morningstar has published an officialmethodology for the new asset class, which came out inSeptember.

For legal reasons, the agency, which is only designated torate asset-backed securities by the SEC, had to specify in itsmethodology that any forthcoming deal had certain features whichlegally define it as an ABS.

If the transaction did not have at least one of thesefeatures - including an asset that can be monetized, or one thathas a defined maturity and amortizes - then Morningstar wouldnot have been able to rate the deal.

Morningstar declined comment on any potential upcoming deal.

However, in its public methodology, the agency said that itwould approach the rating of such a deal by estimating netcashflows from the rental properties.

It would receive a data tape with relevant information -such as property value, rent amount, property expense amounts,and location - and stress those values, taking intoconsideration factors such as the concessions that propertymanagers or leasing companies might give to tenants.

It would also take into consideration repair and maintenanceexpenses and capital expenditures as part of its quantitativeand qualitative analysis. Morningstar has already developed aso-called single-family rental subordination model to rate thisnew class of deals, the agency said.

Similar to the approach taken at Wall Street investmentbanks, all of the rating agencies created teams this year madeup of CMBS and RMBS analysts to evaluate the sector.

Wall Street banks attempting to forge the new asset class,however, were hampered by the agencies, who struggled with howto properly assess the emerging sector.

A coveted rating on a first securitization would make thedeal more attractive to a wider array of investors.

The agencies' reservations included a lack of historicalrental data, issuer reliance on operators who manage rentalproperty cash flow, the variability of cash flow from the rentaland ultimate sale of the properties, and risks involved with theissuance vehicle owning the properties and renting them out totenants (or alternatively, the borrower owning and renting outthe properties while the vehicle owns the mortgage loan on theproperties).

While the agencies were still getting their heads around thepossibility of securitizing the asset, Deutsche Bank has lent toclients via credit facilities. Earlier this year, Deutsche Bankextended a syndicated financing facility of US$2.075bn toBlackstone's Invitation Homes.

It also created five additional single-family rentalfacilities this year totaling US$2.6bn, including a secondfacility for Blackstone.

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