NEW YORK CITY-The commercial real estate industry is still on-the-fence about whether the downgrade of Bank of America, Wells Fargo and Citigroup by Moody’s Investors Service will immediately affect deal-making and property pricing. But sources tell GlobeSt.com that lending for new construction and development could take a hit in an already stagnant market.
"The ratings downgrades were mainly related to the impact of Dodd-Frank and the notion that banks are not 'too big to fail,'" says Matthew Anderson, managing director of Trepp, LLC, in an e-mail. "The larger issues are banks' appetite for CRE lending and demand from borrowers. Both are weak. Among the big banks, Wells Fargo stands out as having grown its commercial mortgage book. All have seen their construction & land development books continue to shrink because of charge-offs and the lack of new construction activity."
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On Wednesday, Moody’s pared Wells Fargo’s senior debt to A2 from A1, and downgraded its major subsidiaries, including Wells Fargo NA, to Aa3 from Aa2. Citigroup’s short-term rating was cut to Prime-2 from Prime-1. The long-term deposit ratings of Bank of America NA were downgraded to A2 from Aa3, while Bank of America Corporation’s (BAC) holding company went from A2 and Baa1 for long-term senior debt and to Prime-2 from Prime-1 for short-term debt. All have been assigned a negative outlook.
The ratings agency says the downgrades are linked to "an increased possibility that the government might allow a large financial institution to fail," a view borne out in the aftermath of the Lehman failure in 2008. However, Moody’s notes that the provisions of the Dodd-Frank Act "could further lower systemic risk and "strengthen regulators’ abilities" to resolve a "systemically important bank" in case of failure.
However, several components of Dodd-Frank, such as resolution plans or changes to the over-the-counter derivatives market, are still pending, Moody’s says. As a result, the ratings agency believes that it would be "very difficult for the US government to utilize the orderly liquidation authority to resolve a systemically important bank without a disruption of the marketplace and the broader economy," therefore prompting the downgrades.
At the same time, Moody’s says the downgrades do not reflect a weakening of the intrinsic credit quality for BAC, based upon its "significant progress" in "improving its capital and liquidity positions by shedding legacy and non-core assets, measuring and monitoring risk and managing its risk appetite."
On the CRE side, Julia Tcherkassova, CMBS strategist at Barclays Capital, tells GlobeSt.com that if any entity is downgraded, rating agencies are usually checking exposure to this entity as a tenant in a building that serves as collateral for loan that is securitized in CMBS. She says if any financial institution is a major tenant in an office building that is behind a loan accounting for 10% to 15% of a CMBS transaction, such transaction might experience some downgrades as well.
"The concern is that the entity that is downgraded might be willing to downsize, occupy fewer floors or leave the building altogether upon the lease expiration," she says, in an e-mail. "We do not anticipate these downgrades to be too substantial though as diversification across tenants and properties remain an important factor in CMBS ratings."
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