Moody's, Fitch Cede Bear Territory to S&P

Moody's and Fitch said this week they don't expect to cut their triple-A ratings on outstanding super-senior commercial MBS, setting the stage for a sharp divide with rival S&P.

Clarifying its intentions in a special report due out today, Moody's said super-senior classes from recent-vintage deals "are unlikely to experience downgrades."

Fitch on Monday issued a similar statement, saying that "super-senior AAA-rated classes are expected to stay AAA for the foreseeable future."

The upshot is that S&P will be by itself at the bearish end of the spectrum among the major rating agencies. S&P has proposed new rating criteria that would lead to downgrades for 90% of super-senior tranches from 2007 transactions, 60% from 2006 deals and 25% from 2005 offerings. The proposal, decried as excessive by many market participants, led to a massive selloff in the CMBS market because it would make many bonds ineligible for the Federal Reserve's new low-cost financing program, called TALF (for Term Asset-Backed Securities Loan Facility).

A comment by an S&P executive this week prompted speculation that the agency might ease back on its proposal, which was put out for public comment. Managing director Kim Diamond, speaking at the Commercial Mortgage Securities Association's annual conference in New York, said it was a mistake to think the proposal was a "fait accompli."

Asked to elaborate, an S&P spokesman said: "There have been no final decisions made about our new CMBS criteria. Once we have examined all of the feedback, we will issue the new criteria."

While the agency might well tweak the proposed methodology changes, the new senior managers overseeing securitization, David Jacob and Mark Adelson, seem intent on implementing stricter policies. Adelson, who was hired as chief credit officer a year ago, has been especially critical of past CMBS rating practices, according to people who have talked to him recently. When he was at Moody's in the late 1990s, Adelson was known for his conservative ratings outlook. He is a longtime a colleague of Jacob, who joined S&P last August as global head of structured finance.

With its proposal, S&P seems to be staking out ground as the toughest agency. If enacted, it will result in stark differences versus the ratings of Moody's and Fitch. S&P has said it could cut the ratings on super-senior CMBS to as low as "A-," or six notches lower than the triple-A ratings that Moody's and Fitch will retain.

A deadline for market players to submit comments passed on Tuesday without being extended, as the CMSA and some others had requested. An S&P executive said more than 100 comments were received.

In its announcement, Moody's said that following a review of updated data, it "expects that most ratings of late-vintage conduit/fusion and large-loan CMBS deals will remain broadly stable."

The agency still expects a 5% average loss on CMBS loans, the same as after a review in February. As a result, it said super-senior CMBS aren't facing downgrades. Mezzanine triple-A bonds, in "A-M" classes, are "stable for now," the agency said. "Further increases in our expected loss estimate could conceivably lead to broad-based downgrades of mezzanine Aaa bond classes, subject as always to significant variability from deal to deal," said managing director Nick Levidy.

Fitch is anticipating average losses for recent-vintage deals to hit 7.5%. Losses could rise as high as 13.5% for the hardest-hit 2007 deals, it added. But in about half of the cases, the losses could take as long as seven to nine years to occur. "We will not take ratings actions based on these worst-case loss scenarios, because it's too hard to say what conditions could exist seven to nine years from now," said Fitch managing director Dan Chambers.

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