August 5, 2011 / 5:05 PM / 8 years ago

IFR-S&P resumes rating new CMBS; no rating changes warranted

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,” it said.

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Goldman Sachs (GS.N) and Citigroup (C.N) were forced to pull an offering the day after pricing because S&P had withdrawn ratings.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 Kroll.

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 class.

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.


“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 spreads wider.

“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 August.

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 Capital Advisors.

“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

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