Tuesday, May 26, 2009

Potential S&P CMBS Downgrades

by Bill McBride on 5/26/2009 04:28:00 PM

S&P put out a request for comment today titled: U.S. CMBS Rating Methodology And Assumptions For Conduit/Fusion Pools (ht Will, Jason, all)

It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals (so-called "A4s," "dupers," or "super-duper seniors") are likely to be affected. Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded. We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages. Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values, and as such, may be more affected by the proposed rental declines discussed in this RFC. We are currently evaluating the impact of the potential criteria changes on conduit/fusion CMBS transactions from all vintages. Once we evaluate the potential impact on existing ratings, we expect to issue a follow-up publication to this RFC.
emphasis added
From Bloomberg: Top-Graded Commercial Mortgage Debt May Face Cuts
The highest-graded bonds backed by commercial mortgages may be cut by Standard & Poor’s, potentially rendering the securities ineligible for a $1 trillion U.S. program to jumpstart lending.

As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report.

“We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages,” S&P said. “Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values,” and may be more affected by falling rents.
This undermines the Fed's efforts to expand the TALF to legacy CMBS. These downgrades would make Super-Senior CMBS ineligible for Legacy TALF funding. Of course the Fed could change the rules ...