Infighting between competing credit ratings agencies and bond issuers is nothing new.
Redwood Trust [stock RWT][/stock] publicly jabbed at Standard & Poor’s about concentration risk in one of its residential mortgage-backed securitizations.
However, it’s rare to see one ratings agency critical of another.
Moody’s Investors Service is criticizing the ratings methodology of S&P in a report on a recent JPMorgan [stock JPM][/stock] commercial mortgage-backed securitization conduit transaction.
In particular, Moody’s is suggesting S&P CMBS ratings may mislead the level of risk in the transaction on six loans, primarily in the retail (mall) space. S&P rated these loans as low investment grade, which Moody’s has a real problem with.
“S&P appears to have assigned no credit enhancement at the low investment grade level to six loans ranging in size from $6.2 million to $125 million,” reads the special comment white paper from analysts Tad Philipp and Nick Levidy. “Not a single one of these loans, based on our analysis, merits investment grade consideration, whether on a standalone or a diversified pool basis.”
And then Moody’s reinforces its case by showing the superiority of its analysis.
“While they do have below average leverage relative to the remainder of the pool, the Moody’s LTV for each of these loans is well into speculative grade,” they continue. “These loans, listed below, total $197.6 million and constitute 17% of the $1,136.6 million pool balance, sufficient in and of itself to lead to a credit enhancement deficiency of approximately 1% at Class E.”
Moody’s claim is that the loans are often in secondary markets, with high tenant concentrations and upcoming lease expirations. The CMBS that wraps these loans is titled JPMorgan Chase Commercial Mortgage Securities Trust 2012-C8, for research purposes.
Here’s the Moody’s final jab:
“Finally, in our opinion, the use of low cap rates by Standard & Poor’s and other market participants in valuing the properties in the pool is shortsighted in an environment of historically low interest rates, and underestimates the refinance risk of loans that mature in 10 years.”
So why would Moody’s do this? It seems like bad business, doesn’t it?
Not so. This is Moody’s way of showing JPMorgan that it should have not hired S&P to do the ratings without also hiring itself to counter-rate.
But will this strategy be effective?
Think of it this way and put yourself in JPMorgan’s shoes on this one.
It makes sense to go with S&P, if only to get that coveted investment grade. This makes the deal more attractive to investors.
Whether or not the deal performs as an investment grade product until legal maturity is a risk the investor will just have to take.