Fitch Ratings said today that bonds backed by rental income from the Seagram Building do not merit the 'AAA' rating asssigned by rivals Kroll Bond Ratings Agency and Moody's Investors Service.

Fitch's beef is that Citigroup and Deutsche Bank, the co-originators of the mortgage on the iconic property, underwrote it using pro forma income. Fitch was invited to pitch for the business but was shut out of the deal after providing preliminary feedback that the top-rated tranche merited no more than an 'A' rating.  

When Fitch reviewed the deal, Citi and Deutsceh had underwritten the loan assuming $20 million of assumed income from anticipated rent increases for tenants currently paying below-market rates and the leasing uut of space currently vacant.

“Downgrade risk could be material in an environment similar to the recent recession, with the realization of pro forma income almost impossible to predict,” Huxley Somerville, head of U.S. CMBS at Fitch, said in the report. He said the use of assumed future income was a major reason many highly rated CMBS bonds were downgraded following the financial crisis.

The dispute comes one day before a Securities and Exchange Commission hearing on legislation designed to address conflicts of interest in the credit rating system.  

In its presale report on the Seagram Building securitization, Kroll said it did not rely on potential revenue increases due to the property’s below market rents in its cash flow analysis of the deal.

Tad Philipp, director of commercial real estate research at Moody's, said the use of pro forma income today is not as liberal as it was pre-crisis. "The problem that came up in CMBS 1.0 was pro forma [income] in excess of intrinsic income producing ability, such as master leases or counting occupancy well above historically demonstrated levels," he said in an email.

"Our assessment of 375 Park’s intrinsic income generating ability is above its current income, and it has historically demonstrated the ability to realize the rents and occupancy used in our analysis," he said.

It's only the latest example of a credit rating agency openly criticizing a rival's assessment of the risk in a securitization. Both Fitch and Moody's have issued special reports this year critical of the credit quality of private label residential mortgage-backed securities. Specifically, they raised concerns about the representations and warranties as to the condition of loans.

And Fitch has also warned that a number of outstanding Mexican equipment lease securitizations to not deserve a triple-A on the Mexican national scale. 

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