NEW YORK CITY-A shockwave in the CMBS market has shaken the commercial real estate industry to the core after Goldman Sachs & Co. and Citigroup Inc. yanked a near $1.5-billion commercial mortgage backed security from the market after Standard & Poor’s declined to rate the deal, the companies announced in a joint statement. The move was prompted by S&P’s decision to further review its CMBS ratings criteria with regard to debt service coverage and ratio calculations, but industry executives tell GlobeSt.com that the changes can damage upcoming deals in the pipeline.
“CMBS just started to improve after being shot-down for two years from the middle of 2008 to the middle of 2010,” says Julia Tcherkassova, a CMBS strategist at Barclays Capital, who tells GlobeSt.com that the reduction of the warehouse pipeline will translate into lower issuance and higher negative net issuance for 2011, estimating a potential 20% decline in total deal volume for the remainder of the year. “Effectively we saw a pipeline of $12 billion of new loans that were already originated that we were waiting for the securitization at the year end. Now it looks like there is a possibility that the underwriters might start to re-negotiate with the borrowers.”
In starting its internal review, S&P says in a statement that the process may result in multiple technical changes to its conduit/fusion CMBS ratings criteria, and until complete, it will not assign new ratings to transactions based on those criteria, including Goldman and Citi’s note, known as the GC4 transaction. The global ratings agency is examining its calculation of debt service coverage ratios, which were based on actual debt service amounts and loan constants specified in the criteria article, according to a statement. And starting around January 2011, the ratings agency started using a simple average of the two methods in the analysis of new deals.
But with changes underway, S&P says the potential impact on outstanding ratings is “uncertain,” which has drawn even more concerns from the CRE industry. John E. D’Amico, the former CEO of the Commercial Real Estate Finance Council and of Connecticut-based law firm Updike Kelly & Spellacy, tells GlobeSt.com that the ratings revisions can cause “disruption” in the market. “There is some uncertainty until the ratings agencies can come up with a uniform application of their rating criteria,” D’Amico says. “I’m not involved with the ratings agencies on a regular basis, but in dealing with the criteria, I am surprised they got it to the stage of a preliminary rating last week, and this week, the ratings changed.”
William M. O'Connor, a partner and chair of the financial services group at DC-based Crowell & Moring, tells GlobeSt.com that he was just flat-out shocked by the action. “In the old days, meaning pre-2008, the result would have been a downgrade of the rating, not an absolute collapse,” O'Connor says, who says despite S&P’s due diligence practices, a fundamental underwriting and rating issue remains. “In the investor community right now, particularly the high-yield community, there’s such a cynicism and loss of confidence in the ratings agencies. Whether they can truly underwrite risk and give an accurate opinion, I think they are relying more on their own underwriting skills. It’s kind of a jaundiced view of recent portfolio offerings.”
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