In that February ratings action, Moody's downgraded senior investment grade bonds, including junior AAA-rated classes, four to five notches, compared to five or six notches for low investment-grade and speculative-grade bonds. Mezzanine and "super duper" AAA CMBS were left untouched in February, although Moody's on Friday warned that mezz AAA classes, "while stable for now, are very sensitive to further increases in expected loss."
Since February, "property prices have continued their march downward," according to Friday's report. As GlobeSt.com reported earlier his month, the Moody's/REAL National All Property Type Aggregate Index for March, released in late May, showed a year-over-year decline of 20.8% from March 2008. In the report released on Friday, Moody's predicts a peak-to-trough price decline of more than 30%, along with capitalization rates trending higher for the next several quarters.
However, the report notes, "despite the grim prognosis for property values, it is important to repeat the point made in the February report announcing our ratings sweep: that property value is primarily a concern at loan maturity." With the bulk of CMBS maturities not due to occur until 2016 or 2017, "the maturity profile of the universe of CMBS loans is relatively benign."
The possibility that this profile could change over time is "something that we are keenly aware of and paying close attention," Nick Levidy, managing director with the structured finance group at Moody's, tells GlobeSt.com. "If the market stays as broken as it is until '16 or '17, when the bulk of CMBS maturities start to occur, it is possible that prior to that time, there would be negative rating implications. But we emphasize that this is seven years from now."
Adds Mike Gerdes, SVP with the structured finance group, "A lot can happen between now and then. If you believe the reverse-J type of recovery, and if there's any deviation from that upwards or downwards, we monitor that."
Gerdes says that while the June report occurs just a few months after the February analysis and rating actions, "We're not intending to do these on a quarterly basis, because we think we captured a forecast looking fairly far ahead." He adds that if conditions warranted it, there would be a follow-up.
Friday's report comes two weeks after Standard & Poor's warned that a proposed change in its rating methodology could result in a downgrade for top-rated CMBS. Levidy declines to comment on differences in the Moody's and S&P methodologies, but points out that his firm took action "early on. We feel that where we moved ratings in February is okay for now." He acknowledges that the update was produced in response to the S&P announcement.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
