By Prabha Natarajan 

NEW YORK (Dow Jones)–In a test of investors’ risk tolerance, the largest commercial mortgage-backed security since the credit crisis came to market Monday–without a credit rating but with some collateral that strictly speaking isn’t commercial real estate.

The $2.66 billion floating rate note is backed by debt from the leveraged buyout of the Hilton Worldwide hotel chain by the Blackstone Group (BX) in 2007, at the peak of the real estate bubble.

The offering document, reviewed by Dow Jones Newswires, explicitly states that the single-class deal is not and will not be rated. It is the first unrated deal since the crisis.

The issue also includes several features that distinguish it from more typical CMBS issues, including an underlying senior loan that has to be extended every year and collateral that can’t be all called real estate.

This complex deal, aimed at sophisticated professional investors, is a true test for investors’ need for ratings, and will determine whether issuers can circumvent the expensive ratings process.

Since the credit crisis, most pension funds, insurance companies and other institutional investors have beefed up their internal research and analytical departments, and prefer to do their own reviews of mortgage securities before they buy them. During the crisis, many investors who had relied on ratings agencies to make their purchase decisions found top-notch, triple-A rated assets could fall to nearly worthless junk in short order.

“It isn’t too surprising to see bonds backed by commercial property without a rating, as many investors feel the ratings added volatility to their investments with their rating actions during the recent recession,” said Darrell Wheeler, senior managing director at Amherst Securities Group in New York.

He added that the concern always was whether there was enough domestic investors who would buy these bonds without a rating. And some investors just may have to sit out because their funds require that they buy a rated, or some times, even specify a triple-A rated deal.

“The fact that it’s not rated doesn’t preclude us,” said Matt Toms, head of US public fixed income at ING Asset Management. “But we can’t own it [without a rating] on a number of our accounts, and that makes it a higher hurdle for us.”

The reputation of Hilton Worldwide, a long-term hotel owner and operator with steady revenues, will appeal to investors. The hotel chain operates nearly 600,000 rooms, and reported earnings of $1.5 billion for the 12-month period ending Aug. 31, according to the offering circular.

Bank of America and Goldman, the firms selling this deal, made a similar gamble earlier this summer when they sold $2.3 billion of mezzanine loans related to the 2007 Hilton transaction. That deal also was not rated, but it attracted more than 150 bidders for the seven tranches, or slices of debt, sources said at that time.

The collateral on this CMBS issue consists of Hilton properties, as well as non-real-estate assets: its franchise and time-share operations. Hotels, which were hard hit in the recession, have since recovered to and operators have reported gains in both daily room rates and the revenue generated per room.

In another sign of recovery on Monday, J.P. Morgan Chase and Deutsche Bank said announced a $2 billion commercial mortgage security backed by Extended Stay Inc.’s hotel properties.

That offering is a lot more on the traditional lines than the Hilton offering, on which the senior loan is set to mature Nov. 12 of this year. Sources say that as part of the restructuring of Hilton debt, completed in April, the loan is expected to extend annually for the next 5 years to 2015.

Other details of the offering include its term of 2.86 years, and its initial interest rate of 2.0054%, which will change with the London interbank offered rate, a benchmark based on what banks charge each other.

“Selling the mortgage as a simple transparent loan that investors can underwrite and with a nice yield over a period of time may make the most sense for this type of large single entity position,” Wheeler said.

However, some others worried that the deal’s complexity will put off some buyers.

“It will be interesting to see the markets’ reaction,” said Jim Harrington, a consultant and former portfolio manager. “At first glance, Hilton is not for the casual CMBS investor.”

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