Nomura Securities recently released a report on the timing issues in rating agency downgrades and surveillance of CMBS deals. The report said that CMBS investors can use the study's results to develop expectations about how the three rating agencies are likely to react in any given deteriorating credit situation.

One of the major findings of the report: Compared to its competitors, Moody's Investors Service has been the first to react to deteriorating CMBS credit quality with watchlistings and downgrades.

For instance, the report said that in 72% of the downgraded CMBS tranches rated by Moody's and at least one other rating agency, Moody's was the first one to act. In contrast, Standard & Poor's and Fitch Ratings were the first to act in a much smaller percentage of cases that involved bonds rated by all three rating agencies or by at least one other agency.

Nomura said that, knowing Moody's propensity to be first to act in watchlisting or downgrading CMBS, buysiders could now devote extra energy toward interacting with the rating agency. "To the extent that an investor ever is able to "sniff out" a rating agency's intentions through casual inquiries (i.e., by sensing hints before formal action is taken with watchlisting or downgrading), the benefit of doing so is likely to be greatest with respect to Moody's," Nomura said.

On watchlistings

Nomura also found that watchlistings do not come before most CMBS downgrades. The report said that both Moody's and S&P watchlisted only about 40% of the CMBS that they eventually downgraded, while Fitch watchlisted only 21%. Nomura said because of this fact, investors could benefit from their own monitoring efforts by responding to indications of deteriorating credit performance before rating agency actions.

The length of time that downgraded CMBS spent on a watchlist before actually being downgraded varied significantly. But S&P watchlistings show the biggest tendency to either be very short or very long, said analysts.

The results of the study showed that watchlistings by Moody's rarely lasted more than six months on bonds that the rating agency eventually downgraded. By the sixth month, the report said that 92% of Moody's CMBS watchlistings that were destined for a downgrade eventually were downgraded.

On the other hand, the proportion of such watchlistings resolved within the six-month framework was only 66% for S&P and 43% for Fitch. The report said that watchlisting by S&P had the greatest tendency to either be very short or very long. For instance, 24% of S&P's CMBS watchlistings eventually destined to become downgrades actually became downgrades in the span of a month.

The report also said that, though ratings decline gradually on most downgraded CMBS, there is notable share of cases where the decline in the ratings was rapid. S&P's CMBS ratings were a little bit over-represented among the fast-declining group.

Because of this, "Investors can devote somewhat extra energy to monitoring CMBS that carry ratings from S&P," wrote analysts. "By a small margin, S&P's ratings on CMBS show the greatest tendency to move quickly, both over the long run and in single rating actions."

The sample for this study was comprised of 335 downgraded CMBS tranches. The sample included CMBS issued from1992 through 2002.

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