Tired of being beaten to a pulp for rating crap real-estate securities Triple-A, S&P is planning to revise the criteria by which it doles out this blessing on Commercial Mortgage-Backed Securities (CMBSs).
Of coure, it’s doing this after-the-fact: Banks have already loaded up on $235 billion-worth of them.
If they come, the downgrades won’t make a lick of difference to the amount of cash these securities actually produce: Crap is crap, no matter how pretty a box it comes in. But the downgrades may affect the banks’ ability to dump their trash CMBSs on the Fed. And if CMBSs are treated the same way RMBSs were treated in terms of carrying values (anyone know?), the downgrades could also presumably trigger additional write-downs.
The FT: Some $235.2bn in bonds backed by commercial mortgages could lose their triple A ratings after Standard & Poor’s tightened criteria for rating commercial mortgage backed securities.
It is the latest blow for the commercial real estate sector where prices have dropped about 25 per cent over the past year as the recession has reduced the demand for office buildings, retail store space, hotels and large multifamily flats.
The potential downgrades complicate efforts by the US Federal Reserve to revive the sector, which could cause billions of dollars in new losses for banks who have exposure to commercial loans on their balance sheets.
The Fed is planning to provide investors, such as hedge funds, loans under the term asset backing securities lending facility to buy existing CMBS.
The current Fed plans specify that it will only finance CMBS with triple A ratings. More >
The FT’s Tracy Alloway also takes a close look at the more stringent requirements S&P is proposing:
S&P on Friday released its updated proposed methodology on Friday. The various documents make for very interesting reading, in particular the agency’s new criteria for credit enhancement or credit support, which cushions against potential losses. The agency wants CMBS credit enhancement levels sufficient for AAA-rated tranches to be able to withstand some pretty severe declines (40 to 50 per cent) in the value of commercial property. More >