Moody's Investor Service said today in an "unsolicited" comment that the JP Morgan Chase CMBS conduit, Commercial Mortgage Securities Trust 2012-C8, lacks sufficient credit enhancement throughout most of the deal's capital structure.
Most of the notes, with the exception of the triple-A rated, Classes A-1, A-2, A-3 and A-SB, lack the appropriate enhancement , said Moody's. The biggest deficiency in enhancement occurs at the lower end of the investment-grade spectrum -- the deal is structured with double-A, single-A, triple-B plus, triple-B minus, double-B and single B rated notes. Standard & Poor's, Fitch Ratings, Kroll Bond Ratings and DBRS were hired to rate the deal.
The ratings agency went as far as saying that the class D and E, the two lowest investment grade classes, would most likely merit ratings two notches below the assigned ratings, with Class E falling into speculative grade. "For these classes, we would assign ratings consistent with those assigned by other agencies only if credit enhancement were substantially higher," said the ratings agency in the report.
The problem, according to the report are the top six loans that constitute 17% of the pool balance "Four of these six loans are for retail properties in secondary or tertiary markets with high tenant concentrations and upcoming lease expirations," says Tad Philipp, Moody's Director of Commercial Real Estate Research. "Based on our analysis, not a single one of these loans merits investment-grade consideration, whether on a standalone or a diversified pool basis."
Moody's is also concerned that valuations based on currently low market cap rates understate long-term refinancing risk. Much of the credit risk in commercial real estate lending consists of the potential for default at loan maturity, and refinancing risk will increase substantially when interest rates normalize. "Current market capitalization rates are appropriate for analyzing the credit of a loan maturing in ten days, but not for analyzing the risk of one maturing in ten years," said Nick Levidy, managing director of Moody's CMBS Group.
Rating agenciesavoid any legal liability with accessing confidential information on the SEC 17g-5 web sites by issuing unsolicited commentary instead of a full out unsolicited rating. The information is based solely on publicly disclosed information. This is the strategy that Moody's and S&P have adopted to date. But it presents its own challenges, since the amount of publicly disclosed data available for a given transaction might be limited.
Fitch Ratings caused a stir in April this year when Credit Suisse dropped the firm's rating of an RMBS because it took a more critical view of the deal than two of its rivals.
Fitch published its analysis of the private 144A CSFB Mortgage Securities Corp. 2012-CIM1, which was backed by approximately $1.3 million of Jumbo prime mortgages originated by MetLife. In an unsolicited comment issued on March 30, it said the credit enhancement levels for the Class A1 and Class A2 tranches were not sufficient to support the triple-A ratings assigned by S&P and DBRS.
Moody's and S&P have been even more reluctant to share dissenting views. In 2010, S&P published a report saying it disagreed with Moody's rating of a transaction sponsored by Redwood Trust called Sequoia Mortgage Trust 2010-H1 ($290 million). Meanwhile, Moody's had previously only commented on Sequoia Mortgage Trust 2011-1 ($289.5 million).