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Thursday, June 04, 2009

S&P on CMBS: Potential Downgrades from AAA to A

by Calculated Risk on 6/04/2009 07:26:00 PM

S&P put out a report this afternoon: The Potential Rating Impact Of Proposed Methodology Changes On U.S. CMBS. A few excerpts:

In our preliminary review of outstanding transactions, there were a number of recent-vintage transactions that required 'AAA' credit enhancement of more than 30% using our 'AAA' stress, which implies that super-senior classes within those deals would be downgraded.
  • Transactions from the 2007 vintage are likely to experience the greatest impact if the criteria are adopted, as most tranches currently rated 'AAA' with 30% credit enhancement ("super dupers") would likely be downgraded. The downgraded classes would have a weighted average rating (WAR) of 'A'.
  • Shorter weighted-average life 'AAA' classes benefit from structural protection and would likely perform better than longer-weighted average life 'AAA' classes. Of the A-2 (five-year) classes from 2005-2007, 25% of the 2005 deals (12 classes, 12 transactions), 10% of the 2006 deals (five classes, four transactions), and 25% of the 2007 deals (15 classes, 13 transactions) are potentially at risk for downgrade based on our analysis.
    Ten-year super-duper (30% credit-enhanced) classes have a higher potential for downgrades than the shorter weighted-average life classes: 50% (2005), 85% (2006), and 95% (2007) of the super-duper 'AAA' tranches would likely be at risk.
  • Note: This appears to be a change from the request for comments issued May 26th, but it really isn't. In the request for comment S&P stated: “approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded.” However that included both shorter and longer weighted-average life classes. It is the Ten-year super dupers that will be hit the hardest.