NEW YORK CITY-Standard & Poor’s, the ratings agency that made headlines last summer after downgrading the US’ sovereign credit rating for the first time in the country’s history, has revised the way it evaluates and rates commercial mortgage-backed securities transactions on the public market. After receiving more than 300 responses from the real estate community following two requests for comment issued in June 2011, the agency has implemented new guidelines to improve and simplify its debt service coverage and ratio calculations.
According to an S&P teleconference on Sept. 5, the new criteria institutes a single comprehensive framework for rating and stand-alone, large-loan and conduit/fusion US and Canadian CMBS transactions by evaluating their location (primary, secondary or tertiary markets) and applying different capitalization rates to better reflect the relative strength of those markets and the quality of commercial real estate. The new criteria also incorporates a lifetime default probability concept, which is predominantly driven by each loan’s credit quality as measured by the agency’s loan-to-value ratio and S&P’s debt service coverage.
The revised plan also implements a comparable global approach to property analysis based on a long-term sustainable property valuation rather than a point in time market valuation. Previously, S&P’s ratings were based on actual debt service amounts and loan constants specified in the criteria article. And starting around January 2011, the ratings agency started using a simple average of the two methods in the analysis of new deals.
Peter Eastham, managing director and lead analytic manager for US CMBS ratings at S&P, says the changes to S&P’s CMBS criteria reflect the "analytical rigor" and "ongoing commitment" to more stable ratings and an improved way of evaluating the relative credit risks of various CMBS structures and loans. "These criteria will allow our analysts to leverage and work efficiently in a unified, global platform that is deeply rooted in S&P’s years of experience and institutional depth in rating various commercial real estate transactions," he says.
Notably, S&P caught some heat last July after declining to rate a $1.5 billion deal put forth by Goldman Sachs and Citigroup because it was reviewing its ratings standards, as GlobeSt.com previously reported. But Gary Carrington, global criteria officer for S&P’s CMBS Ratings, says the agency “reviewed and appreciated the feedback” during the comment period. “The insights we received were instrumental in helping us complete the enhancements to our CMBS rating methodology and reinforced the direction we took with our initial proposal, while providing valuable observations that allowed us to further strengthen key areas of the criteria,” he says.
In addition, S&P adopted additional loan-to-value threshold adjustments to further differentiate loans that have amortization schedules that differ from 10-year term and 30-year amortizing loans. The criteria also specify additional LTV threshold adjustments for loans that have amortizations schedules between 15 and 25 years and 15 years and less.
The ratings agency also revised the adjustment factors for multifamily loans originated for inclusion in the Freddie Mac program as well as Canadian loans to 0.6 for diversified transactions. The revisions result in potentially less adjustment for Freddie Mac multifamily loans and more adjustment for Canadian loans. The proposed adjustment factors for Freddie Mac and Canadian loans were 0.5 and 0.7, respectively.
In conjunction with the revised criteria, S&P will place its ratings on 744 classes (10.5% of outstanding ratings) from 188 transactions on CreditWatch indicating that the ratings may be changes in the next six months.
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