CMBS rating agencies fail to agree on Mint’s strength

Fitch questions quality of assets in multi-jurisdictional hotel issue, reports Alex Catalano
Last month, Fitch Ratings begged to differ with Standard & Poor’s and DBRS over their ratings of the £251m/€131m Mint hotels CMBS. Fitch, which was not mandated on the deal, wouldn’t have rated the senior classes as triple-A, it said.

Fitch questioned the profitability of the Amsterdam hotel in the package; it also thought the two London Hiltons, while good quality, weren’t “best in class” and wouldn’t maintain their outperformance.

“Sometimes we may not rate a deal and that’s a commercial decision from the arranger,” says Euan Gatfield, European head of CMBS at Fitch. “Some investors – I’m not suggesting all of them – ask us what our perspective is. That will prompt us to consider issuing a public comment, if we have something to say.”

This polite but public dissing of a rival’s rating is unusual. However, Fitch has done it before; in 2011 it queried the AAA rating of the DECO-2011 CSPK securitisation of west London business park Chiswick Park.

“We don’t particularly like doing it privately, bilaterally, with investors,” adds Gatfield. “That creates more risk that we might not give a consistent message across all the investors that approach us.”

Mint, structured by JP Morgan, is a new milestone for European CMBS, as the first post-crisis, multi-jurisdictional deal and the first purely secured on hotels, a notoriously challenging asset class to analyse. The bank also sold a separate, €95m mezzanine note  to Cheyne Capital, Insight and Och-Ziff.

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DoubleTree, Amsterdam: vulnerable to corrections according to Fitch

For the four-star, DoubleTree by Hilton Amsterdam hotel, Fitch saw revenue per available room as vulnerable to corrections. “The issue in the Amsterdam hotel market is that revenues have been trending down over the past 15 years or so,” says Gatfield. “Also, operating margins are generally tighter than in London.”

Unwelcome comments

Fitch put out its comment on Mint while the deal was being marketed, but before it was priced. “That is much more difficult for the investment bank to deal with,” a rival banker said. “In terms of marketing the deal, the bank would definitely not appreciate that news item.”

Both the £109.259m and €54.798m top classes of the deal ended up being each priced 20bps wider than the initial guidance given by JP Morgan, at 130bps and 120bps respectively (see table). The lower tranches, with the exception of the sterling-denominated D and E, also priced wider.

Aside from the complexities of the hotel industry, some also thought Mint’s structure was overly complicated, so Fitch’s comment may have only reinforced investors’ existing reservations.

However, the timing of the comments was in line with Fitch’s policy, which aims to “issue any such commentary or rating before investors are required to commit
to purchase a security, ie typically after an offering circular has been published, but before pricing/closing. While this may be potentially disruptive for an issuer, it is clear from feedback from investors that the value of unsolicited ratings/commentary is maximised during this period.”

This resonates with some investors. “It would be more unnerving if comment was issued after pricing,” said one. “The more data and information, the better.”

After the financial crisis, ratings agencies – which earn fees from issuers – came under fire for having given low-quality mortgage pools, especially US sub-prime residential ones, investment-grade credit ratings.

US regulators’ efforts to reform the business include SEC Rule 17g-5, requiring mandated agencies to disclose information about a deal to non-mandates.

This is meant to facilitate “unsolicited” ratings, but only a handful of these are published each year, primarily on the corporate debt of big companies like Twitter or LinkedIn.

For CMBS, non-mandated agencies have preferred to issue unsolicited comments, rather than actual ratings.