Changes to the Standard & Poor's approach to rating commercial mortgage-backed securities conduit/fusion transactions led Goldman Sachs (GS: 109.8706 +1.21%) and Citigroup (C: 30.44 +0.20%) to pull a deal from the secondary markets.
However, the total impact of the S&P decision may hit the entire CMBS market.
For the moment, the ratings agency's internal review only impacts the one deal, but analysts at Barclays Capital said the revised methodology eventually will be assigned to all CMBS conduit deals S&P rates.
"On the individual deal level, this action might be viewed as negative for both the underwriters and investors," Barclays Capital analysts Julia Tcherkassova and Keerthi Raghavan said. "Specific impact will vary depending on how the hedges were executed on both sides."
"It is also unclear at this point if the deal will be eventually brought back to the market and whether its collateral will be fully or partially replaced on top of structural changes," the BarCap analysts added.
The joint Goldman, Citi deal — GS Mortgage Securities Trust 2011-GC4 — was expected to close and settle today, but has been withdraw from the market.
S&P informed clients that its application of debt-service coverage ratio calculations may require "technical changes." In the interim, the ratings agency said it could not confidently assign new ratings to conduit/fusion deals, so-called because of the funding methods the CMBS employs, based on previous S&P criteria and methodology.
"Because of the early stage of the review, the potential impact on outstanding ratings is uncertain," said S&P primary credit analyst Mark Adelson. "Until the review is completed, Standard & Poor's will not assign new ratings to transactions that are based on the conduit/fusion criteria."
S&P currently rates five so-called CMBS 2.0 deals using the conduit/fusion structure. CMBS 2.0 refers to commercial securitizations marketed after the economy collapsed in 2008. The deals are remarkably different and some market players worry about risks associated with CMBS 2.0. Typical conduit/fusion CMBS 2.0 deals are spread out among several commercial properties across the nation and typically more than 40 loans.
There is also a heavier reliance of "B-piece" buyers to hold the riskiest parts of the securitization. Investors in this space are highly diversified and include investment firms employing various strategies, such as BlackRock, Elliot Management, H/2 and Rialto to name a few.
Analysts at the Royal Bank of Scotland (RBS: 8.66 +0.58%) said the S&P review is the result of using an incongruous approach within the credit ratings agency.
"Prior to 2011, (debt-service coverage ratios) used in the criteria were based on the worse of actual debt-service amounts and loan constants," the RBS analysts wrote. "Starting around January 2011, S&P started using a simple average of the two methods in the analysis of new deals, but surveillance continued to use the earlier approach."
David Viklund, counsel in the Paul Hastings real estate practice said the S&P move is only one aspect of the CMBS market facing uncertainty.
"Every securitization that has come out in the last 60-days or so has priced well below expectations," he said. "If CMBS lenders can't predict how their bonds will price with any degree of certainty, it becomes virtually impossible to quote spreads on new loans."
"As a result the pipeline for new loans has significantly dried up," he said. "In just the last 48 hours, one cmbs lender cut the pool size of its upcoming securitization by more than a third in part due to inability to agree on pricing with Borrowers. Another lender had to go back to the drawing board on a bond sale that was supposed to close today as S&P essentially said that they will not rate multi-borrower pools while they reconsider their underwriting criteria."
Write to Jacob Gaffney.
Follow him on Twitter @jacobgaffney.
