On the heels of an SEC agreement that delivered a hefty slap on the wrist and partial ban from rating CMBS to rating agency S&P, a new report from industry giant Moody’s suggests that “other rating agencies” aren’t doing enough to prevent a new credit crisis.
“Those who cannot remember the past are condemned to repeat it,” the US CMBS Q4 Review from Moody’s begins, quoting philosopher George Santayana.
The report states that Moody’s loan-to-value assessments rose to 113.6% in Q4 from 112.2% in Q3, representing a post-recession high; but that “other rating agencies” are not doing their part to apply the commensurate level of credit enhancement, particularly on low or non-investment-grade slices of deals.
The rating agency pointed specifically to “Class D” pieces of CMBS deals that it said other agencies undeservedly rated as investment grade.
“Conduit classes designated D (typically intended to merit a low investment grade rating) and below are particularly sensitive to the distribution of conduit loan leverage given the collateral performance volatility it creates,” the report states.
The rating agency claimed that, of the deals rated Class D — and investment grade — by other agencies in Q4, it would have rated just 30% as investment grade, while it would have rated the remainder as below investment grade and as low as B1 (sf).
Moody’s said that in Q4 its credit enhancement on Baa3 (sf) classes averaged 11.5%, nearly a full percentage point above the 10.6% level assessed for Q3 transactions; but that the average credit enhancement level assigned by other rating agencies on Class D was about four percentage points lower, corresponding to a credit enhancement level Moody’s would have assessed roughly two years ago.
But other ratings agencies stood by their response to rising leverage. “We’ve been steadfast in increasing CMBS credit enhancement to address underwriting erosion and rising leverage for the last few years and will continue to raise levels in response to further declines,” said Huxley Somerville, head of US CMBS at Fitch Ratings, in an emailed statement.
The spat isn’t new. This summer both Fitch and Kroll Bond Rating Agency told Real Estate Capital that some agencies were being more responsible than others with CMBS credit enhancement. Those two agencies also went at it in September regarding the risk inherent in single-family rental securities.
During the recession ratings agencies gave investment-grade ratings to billions worth of bonds that ultimately fell into default. Two weeks ago S&P was banned from rating US conduit ‘fusion’ CMBS for a year and ordered to pay $77m in fines by the Securities and Exchange Commission. That punishment relates mainly to six CMBS deals S&P lied to investors about in 2011 to earn business, according to the SEC.
There was $94.1bn in issuance CMBS issuance in 2014, a post-recession peak, though it’s well below the roughly $169bn, $201bn and $230bn issued between 2005 and 2007, respectively.