Bloomberg News

S&P May Change Grades on $102 Billion of CMBS After Overhaul

September 05, 2012

Standard & Poor’s, seeking to regain market share for rating commercial-mortgage bonds after being frozen out last year, said it’s considering changing the rankings on about $102 billion of the securities it grades after releasing new ratings guidelines.

S&P will review transactions during the next six months to determine the extent to which the methodology overhaul will affect ratings, the New York-based unit of McGraw-Hill Cos. said in a statement today. The changes reflect “ongoing commitment to more stable ratings and an improved way of evaluating the relative credit risks of various CMBS structures and loans,” S&P analyst Peter Eastham said in the statement.

Wall Street banks have been bypassing S&P’s ratings for commercial-mortgage bonds since the company derailed a $1.5 billion sale by Goldman Sachs Group Inc. and Citigroup Inc. last year by pulling its grades on the securities. Since then, S&P hasn’t rated a so-called conduit deal composed of loans from multiple borrowers, the biggest part of the market, according to data compiled by Bloomberg.

The new criteria establish a so-called credit enhancement level for securities receiving top AAA ratings that protects investors from the first 20 percent of losses, S&P said. The guidelines also change the way it calculates capitalization rates, a measure of return on real-estate investments, to better reflect the relative strengths and weaknesses of different cities and regions.

Ratings Review

S&P is considering changing the rankings on 10.5 percent of the U.S. and Canadian commercial-mortgage bond deals it grades. Ratings on $34.4 billion of securities may be cut, while $67.1 billion may be raised, S&P said in a separate statement today. Deals sold between 2005 and 2008, when underwriting standards slipped during the market’s boom, account for 88 percent of potential downgrades, the company said.

For 152 securities classes created in 2009 or later, about 30 percent are on review for an upgrade, said S&P, which set the final guidelines after taking comments from issuers and investors on proposed changes released in June.

Ranking structured products such as CMBS and collateralized debt obligations is one of the most lucrative areas for ratings companies. They generally charge between $1 million and $2 million to grade a CMBS deal, according to a September paper by Andrew Cohen, a researcher at the Federal Reserve. CMBS are bundled loans tied to commercial properties and sliced into securities of varying risk.

Lenders have arranged about $20.5 billion in bonds tied to skyscrapers, shopping malls and hotels this year, compared with $28 billion in 2011, Bloomberg data show. Credit Suisse Group AG forecasts as much as $45 billion in 2012 issuance. Sales are down from a record $232 billion in 2007.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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