In one of the final 2021 transactions, the Western Mortgage Reference Notes, Series 2021-CL2 issued $ 4.5 billion in credit-linked notes. The Notes were also indexed to the Guaranteed Overnight Funding Rate (SOFR).

After the deal, known as WAL 2021-CL2, closed on Dec. 29, the deal became the second for Western Alliance Bank, the issuer of the deal, and the bank’s second credit-related rating. JP Morgan Securities is the sole bookrunner on the transaction, a type of derivative, which will issue the notes through seven categories of notes.

A pool of 5,554 mortgages includes the benchmark bonds, and were initiated and managed by various operators. They represent a balance of more than $ 4.5 billion as of November 30, 2021, according to a pre-sale report by rating agency Kroll Bond.

The $ 4.3 billion senior reference certificate is unrated, but classes M-1 through B are pegged to SOFR. The notes on the note range are from “A-” to “B”. The notes rated, from M-1 to B, have an expected maturity date of July 2059.

WAL 2021-CL2 is made up of blue chip borrowers on predominantly 30-year fixed-rate mortgages, fully amortizing. KBRA notes that the loans were taken out with fully documented income.

The underlying loans in the Reference Pool can be considered to be of generally high quality. Even among non-QM loans, most of their features match what is considered to be the best. They have an Initial Weighted Average (WA) credit score of 766 and a debt-to-income ratio of 33.5%. The benchmark pool is characterized by loans with a low loan-to-original value ratio – on average 68.1%. The known non-QM loans in the benchmark pool are also of generally high quality, with interest-only periods and debt-to-income ratios above 43.0%, KBRA said.

Non-QM loans also have an original WA credit score of 759 and a WA debt-to-income ratio of 40.4%. In terms of the borrower’s equity on the underlying properties, KBRA noted that these levels were “remarkable” and were reflected in WA’s original loan-to-value ratio of 64.6%.

While most of the features of the referenced banknotes are strong, KBRA also pointed out a few potential credit weaknesses. About 18.1% of the benchmark bonds are investment real estate loans, said KBRA, a significant share. Performance may depend on some aspect of the local rental property market.

Another potential weakness of credit, the mortgages of the benchmark pool are not geographically diversified. California, for example, accounts for 64.4% of the benchmark pool loan balance, while Los Angeles is the CBSA’s largest concentration account.