Moody's Investors Service and Fitch Ratings talked to CMBS market players about the future of their respective rating methodologies at last week's Information Management Network European CMBS conference held in London.
Rating analysts admitted that changes had to be made, although they acknowledged that Europe was lucky that it was getting a chance to correct itself before things get out of control.
Andrew Currie, managing director at Fitch, said that just before the negative headlines erupted last year, the agency was asked to look at CMBS deals that had no triple-A value. "Thankfully, Europe didn't get to that level of aggressive deal structuring," he said. "But we were starting to see deals bordering on incompetent, and the market has saved itself by sitting down and reassessing where it's at."
Last year, the agencies began to see more loans with a story. Ifgenia Palimeri, team managing director at Moody's, said that these deals have more of an exposure to a sponsor's ability to fulfill the business plan, which makes them risky in the current environment.
Another problem that emerged is that investors were beginning to analyze CMBS deals as they would other ABS deals, which meant that the particulars such as underlying collateral, property value and tenants might not have been as significant to the analysis as they should have been. "The question you should ask is not whether the deal will default but will you receive your interest on principle on time," said Jerome Gatipon-Bachette, deputy head of CMBS Europe at Societe Generale.
The market also began to see a breakdown in the interaction between rating agencies and investors. "The calls we got became fewer and fewer over the past four years," Palimeri said. "We've not seen any calls in relation to deals partly because most deals performed well and investors were not concerned."
However, she said the surveillance was there, but for certain deals reporting was a problem, which had more to do with issuer inexperience in providing certain information. "Overall, where there is reporting, it could be improved, but we don't want investors leaving with an impression that the current level of reporting is creating a concern," she said.
Currie, on the other hand, was less optimistic and said that aside from the initial reporting provided to get a deal done - where banks are always the most forthcoming - disclosure in European CMBS is insufficient. "The system is immature and it can't support growth; servicers are not set up for the size of the market," he said. "We are working with very poor information."
An issue that servicers face is the enforcement of covenants. Currie said that servicers often feel they have little recourse to get borrowers to come forth with information, adding that enforcement through aggressive measures might lead to legal repercussions.
"The information is available but that information from day one is very different from what you see down the line, and that is a calculation problem," Palimeri said. "We need more consistency."
If the CMBS market is to stage a comeback, the rating agencies have to make adjustments. Greenberg suggested that a shortlist of things that have to be addressed immediately be created. He expects this list to contain the types and consistency of data available. "The rating agencies have access to servicers and investors, and they have to bridge the gap," he said.
Palimeri said that two years ago Moody's adjusted its haircuts on valuations higher because of concerns about where prices were headed. "It's not really changing the methodology, but it was more of an adjustment," she said.
Meanwhile, Currie said that Fitch now has more resources available to work toward better surveillance, but he said that investors, even during these troubled times, have not been communicating regularly. "It's ultimately up to us to find a better way of communicating our views," he said.
Both Currie and Palimeri stressed the importance of investors needing to understand what they are buying and what the potential rating sensitivities could be. "It's all about transparency," Currie said. "Make sure the investor knows what the rating means because with limited time to look at a deal you have to rely on third-party opinions, but make sure you know what that criteria means and that it's a risk you are comfortable taking."
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