Moody's calls out S&P over CMBS ratings standards

By Adam Tempkin

NEW YORK, Oct 10 (IFR) - In an unusual breaking of ranks,Moody's ratings agency called out rival Standard & Poor's onWednesday, saying its competitor had given an investment-graderating to a deal that didn't warrant it.

The rare criticism by name was over a CMBS deal that Moody'shad not been hired to rate - itself a rare event in the world ofcommercial mortgage-backed securities. It was the first conduitdeal that Moody's was not asked to rate since May, 2011,according to Credit Suisse.

The deal in question, a US$1.14bn offering from JP Morganthat came to market on September 27, was underpinned by suchrisky real-estate collateral that parts of it should have beenrated as junk, Moody's said.

"Essentially the deal was a concentrated pool ofuneven-quality collateral," Tad Philipp, the head of CMBSratings at Moody's, told IFR.

"Moody's would need more credit enhancement to get to aninvestment-grade level. The deal had above-average leverage andbelow-average diversity."

At the time, the deal attracted some attention in the CMBSsector because it was heralded as a return to the sector by S&P,which had been virtually frozen out of the CMBS ratings businesssince a gaffe on a major deal last year.

JP Morgan gave S&P a mandate to rate its securities offeringjust weeks after S&P loosened the criteria on a key creditratings metric known as cap rates - a change that in effectleads to a higher rating of creditworthiness on any deal inquestion.

That change attracted a good deal of scrutiny in the marketas well as some less than favorable feedback from some of S&P'srivals, privately complaining that the agency had loosened itsstandards in an effort to win back business following a year inthe CMBS wilderness. For more, see .

But while rival agencies give different credit ratings toindividual securities all the time, it is highly unusual for oneto publicly criticize another over any single deal.

In a report released on Wednesday, Moody's said the"adoption by S&P of lower, more market-based cap rates isextraordinarily risky in this environment of historically lowinterest rates, because doing so fails to fully recognizerefinancing risk."

Agencies DBRS, Fitch and Kroll also rated the JP Morgandeal, but unlike them, S&P appears to have assigned no creditenhancement at the low investment-grade level of the offering,Moody's said. Moreover, of the loans underpinning the JP Morgandeal, the five largest receiving no enhancement are secured byretail properties, which have been the riskiest in the sector.

A Triple B-minus rated slice of the transaction had creditenhancement in the low 6% area, while a similar tranche of aprevious deal had more than 7% credit support.

S&P has denied lowering standards to get new business andinsists that the lower cap rates, which imply higher propertyvaluations, reflect a more historically accurate picture of aproperty's value.

However, Moody's said that valuations based on currently lowmarket cap rates understate the long-term refinancing risk.

"Most CMBS loans have a 10-year maturity, so current-marketcap rates are almost irrelevant," Philipp said.

"You have to have a forward-looking view of credit. Thesedeals are rated for a span of ten years, not ten minutes," hesaid. "It's very short-sighted to be lowering cap rates."

(Adam Tempkin is a senior IFR analyst; Editing by MarcCarnegie)

((adam.tempkin@thomsonreuters.com)(Reuters messaging:adam.tempkin.thomsonreuters.com@reuters.net))

Keywords: MOODY'S CMBS/