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 on Wednesday, saying its competitor had given an investment-grade rating to a deal that didn't warrant it.

The rare criticism by name was over a CMBS deal that Moody's had not been hired to rate - itself a rare event in the world of commercial mortgage-backed securities. It was the first conduit deal 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 Morgan that came to market on September 27, was underpinned by such risky real-estate collateral that parts of it should have been rated as junk, Moody's said.

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

"Moody's would need more credit enhancement to get to an investment-grade level. The deal had above-average leverage and below-average diversity."

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

JP Morgan gave S&P a mandate to rate its securities offering just weeks after S&P loosened the criteria on a key credit ratings metric known as cap rates - a change that in effect leads to a higher rating of creditworthiness on any deal in question.

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

But while rival agencies give different credit ratings to individual securities all the time, it is highly unusual for one to 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 is extraordinarily risky in this environment of historically low interest rates, because doing so fails to fully recognize refinancing risk."

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

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

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

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

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

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

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

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Keywords: MOODY'S CMBS/