S&P CMBS Rating Cuts

On June 4th, S&P put out a report: The Potential Rating Impact Of Proposed Methodology Changes On U.S. CMBS. A few excerpts:

“In our preliminary review of outstanding transactions, there were a number of recent-vintage transactions that required 'AAA' credit enhancement of more than 30% using our 'AAA' stress, which implies that super-senior classes within those deals would be downgraded.”

“Transactions from the 2007 vintage are likely to experience the greatest impact if the criteria are adopted, as most tranches currently rated 'AAA' with 30% credit enhancement ("super dupers") would likely be downgraded. The downgraded classes would have a weighted average rating (WAR) of 'A'.”

“Shorter weighted-average life 'AAA' classes benefit from structural protection and would likely perform better than longer-weighted average life 'AAA' classes. Of the A-2 (five-year) classes from 2005-2007, 25% of the 2005 deals (12 classes, 12 transactions), 10% of the 2006 deals (five classes, four transactions), and 25% of the 2007 deals (15 classes, 13 transactions) are potentially at risk for downgrade based on our analysis.”

“Ten-year super-duper (30% credit-enhanced) classes have a higher potential for downgrades than the shorter weighted-average life classes: 50% (2005), 85% (2006), and 95% (2007) of the super-duper 'AAA' tranches would likely be at risk.”

Rating cuts associated with the new methodology began today with S&P lowering its ratings on 23 classes of CMBS from Credit Suisse Commercial Mortgage Trust Series 2007-C3 and removed them from CreditWatch with negative implications.

"The lowered ratings follow our analysis of the transaction using our recently released U.S. conduit and fusion CMBS criteria, which was the primary driver of the rating actions...."

As an example, GSMS 2007-GG10 A4's (super senior with 30% credit support) were taken from AAA to BBB-. The downgrades mean these bonds are no longer eligible for cheap financing under the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF).

S&P apparently intends to roll out the results of their new methodology over the next “three to six months."