Bonds News

UPDATE 1-Moody's asserts CMBS Aaa rating view, isolating S&P

(Changes headline, recasts)

NEW YORK, June 12 (Reuters) - Moody’s Investors Service reasserted on Friday that top U.S. commercial mortgage-backed securities would likely retain the company’s best ratings even as the real estate market weakens further.

The assessment by Moody’s follows a similar view by Fitch Ratings and Realpoint earlier this week, and further isolates rival credit rater Standard & Poor’s that said it may get more conservative and downgrade a vast amount of CMBS.

Varying assessments by the three major credit rating companies illustrate the difficulty in predicting losses in the $700 billion market that provided more than half the financing for office, retail, apartment and hotel buildings through the real estate boom. While most investors agree conditions for real estate are dire, many have been buying top-rated CMBS on belief that other bonds will sustain all expected losses.

“Moody’s currently expects the ratings announced in February and March ... to remain broadly stable for now, based on our review of updated data,” Moody’s analysts Nick Levidy and Mike Gerdes said in a report.

A broad CMBS rally came to a halt in late May when S&P shocked the the market by advising that new models, if adopted, 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.


A wave of selling is now feared, which could drive interest rates far above the levels that would encourage the fresh lending that’s needed to stop a broader deterioration of the market. A Federal Reserve program aimed at spurring lending in commercial real estate would also be limited in scope if S&P cuts CMBS.

S&P’s proposal raised hackles among investors at a conference this week of the Commercial Mortgage Securities Association in New York. Many agreed that the recession was hurting the outlook for CMBS, but took issue with the proposal that would essentially account for worst-case scenarios now.

In its statement on Friday, Moody’s called for several more quarters of deterioration before a slight recovery in 2011.

But Moody’s also said its ratings account for expectations that commercial property prices will fall about 35 percent from their peak to the bottom. Per its own index, prices are 22.8 percent below their peak of October 2007.

Its expected loss estimate of 5 percent on CMBS issued from 2006 to 2008 can absorb delinquencies of 12 percent -- five times more than the current rate. It assumes total losses, after foreclosure, of 40 percent.

Some analysts warn that other rating companies may eventually have to follow S&P. Some data supports that view.

Already this year, total CMBS losses after foreclosure have doubled to 72 percent, compared with previous years, according to Credit Suisse, a bond underwriter. Of 14 loans liquidated with losses in May, nine had a loss “severity” between 50 percent and 100 percent. (Additional reporting by Ciara Linnane; Editing by Jan Paschal)