Talk about ratings shopping.

The big three credit raters, Moody’s Investors ServiceFitch Ratings and Standard & Poor’s, have all recently tighten their criteria for commercial mortgage bonds in response to a perceived weakening in underwriting quality. This typically leads to the inevitable shopping around to see which rating agency will give the easiest 'A' -- or in this case, triple-A.

This time, there's a twist,according to report published this week by Barclays. The big three are still being asked to rate the senior securities of many commercial mortgage securitizations. But they are increasingly turning to relative newcomers for the triple-B-minus level and below.

So far this year, 10 CMBS tranches out of the 28 issued at triple-B minus level do not carry a rating from either Fitch, S&P or Moody's, according to the report. Instead, these tranches are increasingly rated by Kroll Bond Ratings, DBRS and Morningstar.

“We are now seeing an increasing number of tranches being structured without ratings from any of the big three agencies,” the report states.

The main reason for the shift, according to Barclays, is to avoid elevated credit enhancement levels on these notes. Higher credit enhancement required by the big three agencies makes issuing CMBS deals less profitable.

Triple-B minus tranches without ratings from Fitch, Moody’s or S&P have generally have had lower credit enhancement.  “The difference is relatively small, at about 50 basis points on average, but there is a clear trend of higher credit support for bonds rated by Moody’s and Fitch Ratings, versus those without. Credit enhancements have risen for both groups in Q2-Q3 versus Q1,” the report stated.

The chart below illustrates the trend in credit enhancement levels.

However Barclays noted in the report that the some investors are unable to purchase commercial mortgage bonds unless they carry an investment grade ratings from one of the top three agencies, which “could potentially limit liquidity on these bonds." 

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