Standard & Poor's Ratings Services (S&P) has issued two request for comment (RFC) articles regarding its proposed changes to the criteria it uses to rate commercial mortgage-backed securities (CMBS) transactions.
‘The proposed changes to Standard & Poor's CMBS criteria are part of our commitment to continuous improvement,’ says Peter Eastham, managing director and lead analytic manager for U.S. CMBS ratings. ‘If adopted, the new criteria would provide market participants with more transparency and insight into the factors that influence Standard & Poor's CMBS ratings.
Among the proposed changes being raised by S&P are the following:
- Instituting a single comprehensive framework for rating stand-alone, large-loan, and conduit/fusion CMBS transactions;
- Establishing a ‘AAA’ credit enhancement level of approximately 20% for a typical conduit/fusion transaction based on S&P's ratings definitions and its analysis of a recent Federal Reserve study of commercial real estate bond performance during the U.S. Great Depression;
- Utilizing a recovery-based analysis as the basis of the new framework, similar to Standard & Poor's existing approach to rating stand-alone and large-loan transactions;
- Incorporating a lifetime default probability concept, which is predominantly driven by each loan's S&P loan-to-value (LTV) ratio and debt service coverage (DSC);
- Adjusting credit enhancement levels to account for varying levels of transaction diversity after calculating S&P LTV and S&P DSC;
- Implementing a comparable global approach to property analysis that will shift the ratings approach for U.S. and Canadian transactions to an expected-case analysis;
- Lowering loan recovery rate assumptions in the proposed U.S. and Canadian transaction-level analysis to account for higher S&P values; and
- Differentiating properties located in primary, secondary and tertiary markets and applying different capitalization rates to better reflect the relative strength of those markets and the relative quality of commercial real estate.
‘The proposed criteria are grounded in Standard & Poor's ratings definitions and reflect the historic performance of commercial mortgage assets and the quality, depth, and experience of Standard & Poor's global CMBS analytical team,’ says Eastham.
S&P is seeking written comments through July 2. Input can be sent to criteriacomments@standardandpoors.com.
