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S&P Restores Top Ratings to CMBS Bonds

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In a surprising about face, Standard & Poor's has restored the AAA ratings to three CMBS bonds sold in 2007 that it had cut last week. This is a short story. The key paragraph is the last and I've bolded it below.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve's Term Asset-Backed Securities Loan Facility to jumpstart lending.

S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.

“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”

Debt rated below AAA isn't eligible for the Federal Reserve's TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.

Bonds rated below AAA are not currently eligible for the Federal Reserve's TALF program. S&P's rating cuts, therefore could have reduced the pool of eligible assets. S&P first began talking about downgrades in April. This triggered some rancor in early June. There was an excellent viewpoint from HousingWire on this around that time. There as another good look on June 29 at the implicatiorns of the move.

Meanwhile, S&P's rivals made a point of coming out and saying they would not emulate the move. On June 8, Fitch issued a release saying it expected super senior CMBS to hold onto 'AAA' ratings. (Although in late June, Fitch said it expects 2006 through 2008 vintages of commercial mortgage-backed securities (CMBS) to “substantially underperform” earlier vintages.) On June 15, Moody's affirmed its Aaa ratings on CMBS bonds. Meanwhile, there are smaller up-and-comers that are trying to compete with the major rating agencies including Realpoint LLC and Dominion Bond Rating Service and other Nationally Recognized Statistical Rating Organizations.

There's something that could make the rating agency jockeying moot, however. Speakers from commercial real estate trade organizations during hearings at Congress on July 9 suggested that CMBS that had received AAA after origination--even if downgraded later--should be eligible for the TALF program. That would widen the universe of eligible bonds substantially. It remains to be seen if that will occur.

Naked Capitalism also has an interesting post on this move by S&P.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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