Moody's Investors Service published an "unsolicited" comment today that warned investors that it would not have assigned a 'Aaa' rating to the senior notes in the Royal Bank of Scotland's (RBS) Isobel Finance No.1 PLC deal. This is Europe's first nonperforming real estate loan portfolio CMBS.
The £463.2 million ($747 million) deal was rated by Standard & Poor's earlier this month. It partially funds the purchase of legacy commercial real estate loans from bank balance sheets. The deal securitizes RBS' loan to Isobel (jointly owned by RBS and Blackstone) to partially finance the transfer of a nominal £1.4 billion portfolio from the RBS group's entities, according to S&P.
The capital structure offered investors £230 million of triple-A rated class A notes; and GBP60mn of single-A rated, class B notes. A tranche sized at £173.2 million of double-B-plus rated class C notes was retained by the bank.
Moody's did not rate the deal, but said today that had if it had done so, the senior notes would have been rated in the 'Aa' category. The more junior notes would have been rated at least three notches below the ratings currently on the transaction.
Moody's opinion is based on the quality of the assets. The rating agency said that it is not consistent with its 'Aaa' ratings opinion because of the extra leverage due to swap termination payments, its principal allocation waterfall, and the complexity of the underlying loans.
The rating agency said that reaching the 'Aaa' is very challenging for securitizations of portfolios of nonperforming commercial real estate loans.
To achieve the top rating, a transaction would have to have a majority of standard property types, no material exposure to swap mark to market, a transaction structure that maximizes recoveries to senior noteholders, and simple underlying loan structures without multiple stakeholders, according to Moody's.
Moody's warned that over 90% of the assets in the loan portfolio backing Isobel are of secondary or tertiary quality, and more than half by asset value are operating assets, such as hotels, car parks, and nursing homes, which are harder to sell than most commercial properties.
Hedging structures in the transaction also reduce recoveries and make managing the assets backing the transaction difficult. The payment waterfall structure allows recoveries to leak out of the structure.
It's the second time this week that the rating agency has stepped in to interject an unsolicited view on a securitization deal. On Monday, Moody's published its opinion on the JPMorgan Chase CMBS conduit Commercial Mortgage Securities Trust 2012-C8 and said that the deal lacked sufficient credit enhancement to support the notes rated at the lower end of the investment-grade spectrum. S&P, Fitch Ratings, Kroll Bond Ratings and DBRS were hired to rate the deal.