Moody’s Investors Service may not be the only credit rating agency to get the ax after asking for more investor protections on commercial mortgage bonds.
Fitch Ratings has been excluded from rating the junior tranches of at least two deals after increasing the required subordination for a BBB- ratting, according to JP Morgan. “The preliminary term sheets for the two deals currently marketing show that Fitch is excluded from both deals,” the bank said in a report published this week. It does not name the deals.
The two most recent CMBS that were rated by Fitch, MSBAM 2015-C22 and WFCM 2015-NSX1, had credit enhancement levels of 8.5% and 8.375% respectively, on the BBB- rated tranche, according to JP Morgan. That’s an increase from most of the deals rated by Fitch earlier this year, which had credit enhancement just below 8% for the BBB- tranches.
JP Morgan believes that this increase may be the reason that Fitch was excluded from rating the equivalent tranche of two deals currently in the market.
If that’ the case, Fitch is not alone.
Moody’s Investors Service, which is generally viewed as being even tougher on commercial mortgage bonds than Fitch, hasn't rated a BBB- tranche of a deal since April 2014. And more recently, Moody’s has been excluded from rating more senior tranches of deals after demanding higher credit enhancement for an Aaa rating.
Sponsors of commercial bond securitizations that exclude Fitch and Moody’s pay a price. Investors are demanding additional spread on deals that lack a rating from any of the big three rating agencies Moody’s, Fitch and Standard & Poor’s -- as well as for the perception that the credit quality of these deals is poor. And S&P is currently banned from rating conduit CMBS as part of a settlement with the Securities & Exchange Commission.
JP Morgan found that on deals that have priced so far this year, pricing spreads for AA-, A-, and BBB- bonds rated by Fitch are, on average, more than 24 basis points tighter than those without Fitch ratings.
"Recent pricing studies have shown that investors have a preference for Fitch-rated CMBS, confirming that they are supportive of our credit stance,” said Kevin Duignan, global head of securitization & covered bonds at Fitch, said in an e-mail. “We will remain vigilant on credit even if that means we ultimately rate fewer transactions."
For now, issuers are likely to pay the extra spread concession to forgo the Fitch/Moody’s ratings, because it’s not significant enough to “greatly impact” profitability, according to JP Morgan. “Assuming a B-piece yield of 15%, the weighted average deal breakeven spread is roughly 170 basis points using a generic deal structure. If we move AA-, A-, and BBB- spreads wider by 25 basis points and keeping the structure unchanged, the breakeven spread only widens by about 4 basis point,” the report states.
The chart below shows the average spreads for 2015 conduit CMBS junior bonds rated by Fitch but not by Moody’s and bonds rated by no major rating agency.