Bloomberg News

S&P Probe Roils Atlantis to Mall of America Debt: Credit Markets

July 30, 2014

Mall of America

Mall of America, the nation’s biggest shopping center in Bloomington, Minnesota. Photographer: Ariana Lindquist/Bloomberg

Wall Street’s plans to sell securities tied to more than $3 billion in commercial-property loans are being hampered by a regulatory probe of Standard & Poor’s, the biggest grader of such debt.

Bankers are rethinking whether to hire S&P to rate bond deals linked to real estate including the Mall of America, the nation’s biggest shopping center in Bloomington, Minnesota, and the Atlantis resort in the Bahamas, according to two people with knowledge of the discussions. Lenders are balking after S&P said last week it’s facing U.S. Securities and Exchange Commission enforcement actions after a probe of commercial-mortgage deals it rated in 2011, the people said.

The investigation is threatening S&P’s dominance in the market for commercial-mortgage backed securities tied to single borrowers, which surged to a record $25.3 billion last year. Lenders often seek out S&P’s ratings on those transactions because they can squeeze more profit from their grading methodology than that of the second-largest ratings firm, Moody’s Investors Service, according to Lea Overby, a bond analyst at Nomura Holdings Inc., who said banks now may be reluctant to hire S&P amid the regulatory scrutiny.

“There is too much uncertainty,” said Overby, who is based in New York. “It’s not totally clear whether or not S&P will be able to support these ratings in the future.”

S&P ‘Committed’

Doug Peterson, chief executive officer of S&P parent McGraw Hill Financial Inc., told analysts on a conference call yesterday that the firm remains “very committed to the CMBS business.”

The firm will continue “serving the CMBS market for the long-term and providing market participants with high quality ratings and research,” S&P spokeswoman April Kabahar said later in an e-mailed statement.

McGraw Hill said in the disclosure last week that the SEC is considering actions that could include anything from civil money penalties to revocation of the grader’s accreditation. The so-called Wells notice is related to six commercial-mortgage bonds S&P rated in 2011.

Those deals included a $1.5 billion transaction that Citigroup Inc. and Goldman Sachs Group Inc. were forced to abandon when S&P yanked its grade after the securities were placed with investors. The credit rater dropped the rankings after discovering potential discrepancies in how it was applying its own methodology, the company said at the time.

Staff Cuts

The SEC probe follows a move by the New York-based ratings company to cut about a third of its staff in the commercial-mortgage division, a person with knowledge of the matter said last week.

Deutsche Bank AG (DB:US), the top underwriter of U.S. commercial-mortgage bonds, is leading the $1.65 billion Atlantis deal alongside Citigroup, said the people, who asked not to be identified because the discussions are private. Citigroup is also among a trio of lenders including Credit Suisse Group AG and Wells Fargo & Co. that are arranging the $1.4 billion loan for the owners of the Mall of America, people with knowledge of that deal said last month.

Representatives of the banks declined to comment.

The bungled 2011 deal sidelined S&P in the commercial-mortgage bond market for more than a year and eroded McGraw Hill’s market share for rating the debt. In the first half of 2014, S&P slipped to fifth among companies that rate CMBS from second in 2010, according to industry newsletter Commercial Mortgage Alert.

Rosier Methodology

Even as its share of the broader CMBS market plummets, the largest part of which are deals that bundle together multiple loans on a range of properties across the U.S., S&P has grabbed the lead in the market for single-borrower deals. This is in part because it uses a methodology allowing for a more optimistic outlook on a building’s future value than what Moody’s uses, according to bankers that arrange CMBS deals. That means banks can build a smaller cushion to protect bondholders from losses should a borrower default, enabling issuers to sell larger portions of expensive top-ranked bonds.

CMBS issuers have options when it comes to choosing a ratings company. Several other firms have pushed into the market since issuance restarted in 2009 after the global credit seizure shut it down for more than a year. Morningstar Inc., which moved into the ratings business in 2010, ranks behind S&P in the single-borrower segment with a 47.6 percent market share, according to Wells Fargo. Moody’s is third with 43.7 percent.

Investor Needs

Either S&P or Moody’s, the two largest rating companies, are typically needed to sell large deals because money managers are often required to have their ratings to hold bonds.

S&P cut 16 people in its CMBS group and moved other analysts across the country in a reorganization this month. Peter Eastham is stepping down as the group’s head and shifting to his native Australia, the person with knowledge of the decision said. The move is a realignment to “better leverage its staff on the ground and in major markets,” Catherine Mathis, a spokeswoman for McGraw Hill, said in an e-mailed statement earlier this month.

Lenders briefly pulled back from writing new loans for sale as bonds when S&P dropped its ratings on the 2011 deal. Bank analysts across Wall Street criticized S&P’s decision to pull its ratings, saying the move eroded confidence in a market that was still regaining its footing following the financial crisis.

Credit Crisis

That was not the first time S&P roiled the CMBS market, where landlords from Blackstone Group LP (BX:US) to the owners of the local supermarket turn to refinance debt and acquire buildings. In May 2009, the rater said an overhaul of its rankings on bonds issued before the financial crisis would lead to cuts on as much as 90 percent of top-ranked debt, rendering the debt ineligible for a Federal Reserve program aimed at jumpstarting real estate lending.

Issuance of CMBS is forecast to reach as much as $100 billion this year after sales doubled to $80 billion in 2013, according to data compiled by Bloomberg. About $45.5 billion has been sold through July, including $14.5 billion in single-borrower deals, according to Morgan Stanley.

“Given the scant amount of information” on the SEC’s investigation, “it is difficult to assess the potential fallout,” Credit Suisse analysts led by Roger Lehman in New York said in a report last week. “The news bears monitoring.”

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

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Faris Khan


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