At the Commercial Mortgage Securities Association (CMSA) 10th Annual convention held here last week, rating agencies talked about their relationships with various industry participants, specifically issuers, and explained what different participants are doing right or wrong.

To issuers, Jack Toliver, senior vice president at Dominion Bond Rating Service, said, "Show us the money." He, of course, was not referring to the high fees that rating agencies supposedly charge but to having sufficient cashflow in CMBS deals.

Moody's Investors Service Managing Director Tad Phillip said "rating shopping" seems prevalent among issuers, which is understandable given the desire to maximize credit support. Standard and Poor's Managing Director Kim Diamond said that issuers should be proactive in dealing with structural nuances so there is no room for surprises in the end.

She also said that industry participants should resist the temptation to use rating agencies as mouthpieces to promote their causes, although this is a good approach to use to deal with industrywide issues.

Panelists also took particular interest in diminishing credit support on CMBS deals.

Moody's Phillip said that current credit support is about where it should be. The market should be concerned about the volatility inherent in recent CMBS transactions, given the increased amount of larger loans, the lower subordination levels and rising interest rates. He said that market participants should not get caught up with the track record of transactions, but rather take note of the favorable conditions when the deals were issued - high subordination and low interest rates.

S&P's Diamond said that the current compressed level of credit support - in which newer deals have less subordination - is justified by empirical data. However, market participants should look out for the loans that are up for refinancing as well as the new entrants to the origination market. With more competition on the origination front, this might result in the erosion of underwriting standards.

In terms of defaults, Fitch Ratings Managing Director Susan Merrick referred to the agency's bond default study (see related story, p. 14). The study shows that the incidence of defaults in the CMBS universe in the past 14 years was notably low, as it only affected 0.2% of the dollar balance of all CMBS-rated classes.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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