Standard & Poor's will tighten its criteria for rating commercial mortgage bonds this summer, resulting in downgrades for some deals unless a greater cushion against losses is added.
S&P will take comments on the proposed changes until July 2. The credit ratings agency will require issuers to provide a 20% credit enhancement level on deals in order to get the coveted AAA rating.
Among other changes, S&P will differentiate underlying commercial properties based on location, whether they're in the largest markets, secondary or tertiary markets.
Roughly 15% of the 1,100 tranches and 100 transactions S&P analyzed for the criteria changes would be downgraded. Another 10% would receive upgrades, and three-quarters of the deals would be unaffected.
When S&P proposed the rules last year, many commentators suggested the 20% credit enhancement level was arbitrary.
S&P analysis showed the average loss level on CMBS loans from 1972 through 2008 was between 17% and 22%, according to the documents released Monday.
Most of the 150 "super senior" tranches, which hold a 30% credit enhancement, would either maintain their super-senior status or be upgraded as part of the changes. Only 5% would be downgraded as part of the rule change.
Rival credit ratings agency Fitch Ratings said in January that issuers are already building in higher credit enhancements than at any time in the past decade.
"The proposed changes to Standard & Poor's CMBS criteria are part of our commitment to continuous improvement. If adopted, the new criteria would provide market participants with more transparency and insight into the factors that influence Standard & Poor's CMBS ratings," said Peter Eastham, managing director and lead analytic manager for CMBS ratings.