S&P cuts may split CMBS market, not undo TALF - RBS

NEW YORK, June 9 (Reuters) - A Federal Reserve program to boost lending in U.S. commercial real estate can survive potential credit ratings downgrades on commercial mortgage-backed securities, though on a smaller scale than envisioned, Craig Sedmak, a managing director in CMBS trading at RBS Securities, said on Tuesday.

Sedmak's comments come after Standard & Poor's shocked the $700 billion CMBS market this week by advising that a vast amount of top-rated bonds face ratings downgrades based on a proposed change in rating models.

The cuts are seen as a threat to the Fed program since the central bank currently requires the bonds carry only "AAA" designations to protect its interests.

Commercial mortgage backed securities (CMBS) are the latest asset class to be made eligible for the Fed's Term Asset-Backed Securities Loan Facility (TALF), which aims to boost lending by offering funding to investors to buy bonds that finance loans.

Since March, TALF has seen some success in countering the financial crisis of the past year by lowering borrowing costs and boosting availability of auto and credit card loans.

S&P last week said its proposal to make its models more conservative would likely prompt ratings cuts on 95 percent of top bonds issued during the peak of the real estate cycle in 2007, and 85 percent of CMBS from 2006. The rating agency is accepting feedback from the industry through today.

"There are still all sorts of bonds that qualify," Sedmak told reporters after a panel hosted by the Commercial Mortgage Securities Association in New York.

But "all you do is bifurcate the market, and let S&P be the factor," he added. "That's the scary part."

S&P's new rating method would reduce the amount of 2005 to 2007 bonds available for TALF to $122 billion from $252 billion, according to Deutsche Bank analyst Richard Parkus.

Expanding the TALF program to new, then also existing, CMBS earlier this year was cheered by the industry leaders who say many defaults are occuring due to lack of financing and not cash deficiencies.

General Growth Properties Inc., the No. 2 U.S. mall owner, in April filed for bankruptcy protection in part because it could not reach new financing agreements for billions of dollars in maturing debt.

CMBS investors are locked in debate over whether S&P will back off some of its more conservative assumptions, which come as the recession is forcing rising vacancies and falling rents. But the rating company appears "pretty adamant" about its proposal, Sedmak said.

Risk premiums have jumped in recent weeks, indicating investors see S&P changes as likely.

However, some investors still believe that the Fed will soften its guidelines for eligibility in TALF to account for top bonds whose ratings have been cut, Sedmak said.