by Adam Tempkin
NEW YORK, Aug 5 (IFR) - Standard & Poor's relieved a
rattled CMBS market today by announcing that a preliminary
review of its criteria found that no rating changes on
outstanding deals are immediately warranted, and it will resume
assigning ratings to new conduit/fusion CMBS transactions.
The review process is continuing, but the agency "does not
expect any such criteria update to result in a large number of
rating changes on outstanding CMBS conduit/fusion securities,"
The announcement capped a turbulent two weeks for the CMBS
market, initially triggered by a shocking announcement on July
27 from S&P.
The agency's discovery of an error in its methodology and
its suspension of ratings on all new CMBS pending a criteria
review prompted a precipitous market swoon.
Goldman Sachs (GS.N) and Citigroup (C.N) were forced to
pull an offering the day after pricing because S&P had
withdrawn ratings. The agency also cancelled Freddie Mac's
FMCC.OB multifamily CMBS ratings on July 28.
The agony for the hobbled US CMBS market continued, with
the third deal in a week pulled from circulation by bank
sponsors this past Monday, and investors in risk-aversion mode
on talk of a US double-dip recession.
Deutsche Bank and Wells Fargo shelved the US$670m Prima
Capital CRE Securitisation 2011-1, the first post-crisis
commercial real estate CDO, which was only rated by Moody's and
The increasingly gloomy global economic picture probably
contributed most to the pulling of the offering, said one
investor, although S&P's review had increased uncertainty and
hurt sector confidence.
In the past week, much of the confidence and hope for the
slowly-reviving sector has vanished, according to market
observers -- investors wanted nothing to do with the asset
The dramatic setback, sparked by S&P's unexpected ratings
review announced in late July may have severe repercussions for
a market facing nearly US$1trn in loan maturities over the next
three years, securitization specialists said.
"The revived CMBS market and overall optimism of the first
quarter of 2011, I'm afraid, won't return for quite some time,"
said David Viklund of law firm Paul Hastings.
The recent uncertainty in the market may make it more
difficult for lenders to price their warehoused loans, Viklund
said. This makes pricing those loans much trickier, and lenders
may shy away from writing new mortgages.
NEW ISSUANCE: STILL ON HOLD?
"The reverberations from S&P's announced criteria review
have largely put the new issuance market on hold and dried up
secondary trading activity in CMBS 2.0. The byproduct of these
factors is clearly not positive for the sector," said Harris
Trifon, head of CMBS research at Deutsche Bank, in a research
report earlier in the week.
Meanwhile, a sell-off in stocks caused by weak economic
data, namely a decrease in consumer spending (although payrolls
came in at 117,000 versus an estimate of 85,000), forced CMBS
"CMBS bid lists that are DNT -- or 'did not trade' -- are
pretty high right now," said Adam Murphy, president of capital
markets data provider Empirasign Strategies. "Funding pressures
are hitting all sectors. And DNTs are much higher than we can
observe because distributed color has been very light. So it's
a safe bet that a lot of these lists that just go into the
ether did not trade."
News deteriorated as the week progressed. Commercial real
estate information provider Trepp said CMBS loan delinquencies
exceeding 30 days rose 51bp in July to a record 9.88%.
S&P meanwhile is forecasting a further 25bp increase in
Despite the rater's continuing loss of credibility,
investors had eagerly awaited S&P's next statement regarding
the criteria review, as it is was unclear how far back the
agency would go in re-rating deals.
"One has to wonder why S&P suddenly figured out it got its
math wrong on rating all these deals, especially after
investors fought to increase S&P's initially thin 14.5% credit
enhancement to 20% on the Goldman/Citi GSMS GC4 deal on July
20, and succeeded," said a CMBS investor.
The latest series of events enforced a pause for market
players hoping for a continued revival of the CMBS sector,
which has seen roughly US$20bn in issuance this year.
"Given a very high volume of existing commercial real
estate loans maturing in the next three years, a working and
efficient CMBS new-issue securitization market is critical to
avoid further defaults on otherwise solvent properties," said
Ron D'Vari, co-founder of advisory and solutions firm NewOak
"There needs to be further standardization in the
underwriting of the underlying collateral loans and better
transparency in the rating methodology. The parties involved in
the securitisation process are slowly learning this important
requirement, but perhaps not fast enough," he added.
(Adam Tempkin is a senior IFR analyst)