Standard & Poor's published a Request For Comment where it seeks market feedback on the proposed changes to the methodologies and assumptions it uses to rate U.S. conduit or conduit/fusion CMBS deals.
While the rating agency will leave its property evaluation criteria unchanged, it said that the movement toward determining credit enhancement levels reflects a considerable update to its methodologies and assumptions. This also hinges on establishing a enhancement for 'AAA' ratings that is enough to enable tranches rated at that level to withstand market conditions commensurate with an extreme economic downturn without defaulting.
The key aspects of the proposal on which we are requesting market feedback are:
-- Establishing 'AAA' credit enhancement levels that we expect will be sufficient to withstand a pre-set level of commercial property income declines. By extension, the 'AAA' credit enhancement levels will also be sufficient to withstand severe declines in property values.
-- Refining the agency's capitalization rates to provide greater specificity and consistency from one pool to another.
-- Introducing a standardized method to assess geographic concentration.
-- Using a forward-looking commercial real estate forecast for the term of the transaction to determine our expected loss of each transaction we rate.
-- Revising our surveillance methodology for projecting losses.
The goal of the proposed framework is to provide the market with a more transparent and straightforward approach to assessing the creditworthiness of CMBS securities. Defining the rating agency's average stress for 'AAA', 'BBB', and 'B' credit enhancement would offer market participants with clearer benchmarks against which all pools are measured, both in with regards to credit support provided and the particular risk characteristics of each deal.
The rating agency's analysts also propose to make the criteria more responsive to changing conditions by placing greater emphasis on how macroeconomic factors affect property-level credit risk factors (such as income and valuation), the firm's outlook on the commercial real estate sector, and the economy's state.
The complete article, "Criteria | Structured Finance | Request for Comment: U.S. CMBS Rating Methodology and Assumptions For Conduit/Fusion Pools," was published May 26 on RatingsDirect.The article is also posted in the " Criteria, Policies, Definitions, & Requests for Comment" section of the rating agency's Web site.
S&P officials encourage all market participants to submit comments on the proposed criteria by June 2. Written comments should be sent to
