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CMBS Market at Risk with Proposed Rating Plan

WASHINGTON, DC-There is concern that Securities and Exchange Commission's proposal to provide separate rating categories for structured securities could keep the CMBS market indefinitely dormant.

By Erika Morphy | Updated on June 22, 2008

WASHINGTON, DC-Recently the Securities and Exchange Commission voted to propose a series of comprehensive credit rating agency reforms. Included were measures that would increase the transparency and efficiency of the rating agencies’ decision-making processes. For instance, a credit rating agency would be prohibited from issuing a rating on a structured product unless information on the underlying assets was available. Another proposed measure would require credit rating agencies to publish performance statistics for one, three, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry.

Then, the SEC went on to propose a second series of measures that raised alarm bells with investors and lenders. These would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds — either through the use of different symbols, such as attaching an identifier to the rating, or by issuing a report disclosing the differences between ratings of structured products and other securities.

The are widespread fears that if rating agencies develop a separate category for structured securities it will further erode investor confidence in CMBS and RMBS and delay these markets’ return. There has a growing drumbeat for the rating agencies to separate or at least differentiate its rating scale for structured securities for the last year, Dave Krohn, partner in DLA Piper’s Corporate Finance practice, tells GlobeSt.com. Fitch, Moody’s and S&P have all put out requests for comments about the pros and cons of doing so, he says. Also, similar proposals have been floated in Congress. But it is the SEC’s proposal that is most likely to translate into actual regulation, Krohn explains, as the 2007 Credit Reform Act gave the SEC the necessary authority to push through these rules.

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