The second quarter of 2004 recorded the second-highest CMBS upgrades ever in a three-month period, according to Standard & Poor's. In addition, the period recorded the lowest number of downgrades since 3Q01. Overall, S&P said there were 155 North American CMBS ratings actions during the second quarter, with 119 upgrades and 34 downgrades. Year-to-date, there has been 173 upgrades and 95 downgrades in 268 ratings actions.
S&P said that factors driving the positive performance included low loan default levels, strong demand for loan originations and low interest rates. Still, there are some areas of concern, said S&P. For example, analysts noted that a majority of the negative ratings actions have occurred in floating-rate transactions due to adverse loan selection. In particular, 2002 vintages are showing signs of stress.
In an article discussing S&P's report, Bear Stearns noted that many of the upgrades were in bonds that were below investment grade. Researchers said historically most upgrades were in the investment-grade (IG) sector, while most downgrades were in the speculative sector, but it seems the tide is turning. Based on Bear Stearns' analysis, the non-investment grade bond upgrades by S&P have increased each year for the past three years. Also of note, the majority of non-investment grade bonds that have been upgraded during this period are from 1996, 1997 and 1998
deal vintages.
Bear Stearns believes the trend will continue and that seasoned non-investment grade and split-rated triple-B/double-B bonds provide an excellent opportunity to pick up credit support and spread versus new issues of similar credit quality. In addition, these bonds could benefit from additional tightening related to potential future ratings upgrades.
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