If the Securities and Exchange bans Standard & Poor’s from rating commercial mortgage backed securities, as it is reportedly planning to, bonds backed by a single, large asset would be hit disproportionately, according to J.P. Morgan.
That’s because S&P has gained a large share of the market for rating such deals. It has rated 37 deals backed by a single loan on a single, large asset so far this year. By comparison, S&P has only rated 3 conduit deals in 2014 and none since the S&P issued a Wells notice.
Last week, Bloomberg reported that the SEC was seeking to suspend S&P from rating all CMBS deals. The move is tied to alleged violations of securities laws with respect to six CMBS deals that S&P rated in 2011. The SEC first highlighted the issue in a Wells notice sent to S&P parent company, McGraw Hill, in June.
Morgan Stanley is forecasting CMBS issuance of $125 billion 2015; $80 billion of from conduit deals and $45 billion of single asset, single borrower /floater issuance.
S&P is the sole major rating agency on many single-asset, single borrower deals. In a report published last week J.P. Morgan attributed this to the fact that S&P’s rating models “frequently permit a larger senior loan relative to the senior loan from other agencies.”
Neither the SEC nor S&P have commented on the Bloomberg report, which also indicated that the rating agency was fighting against the CMBS ban. However analysts both at JP Morgan and Morgan Stanley have stated in reports that they are optimistic the SEC won’t look to pull S&P ratings on legacy deals. Such a move would penalize investors more than it would impact S&P, according to analysts at these banks.
S&P has rated 114 private label CMBS 2.0 deals since 2009, according to Morgan Stanley.
“The only exception could be those 2011 deals if the current ratings are not consistent with the existing S&P model,” stated JP Morgan. “ These deals should benefit from some de-leveraging and net cashflow growth. In addition, all but one of these deals has another major rating agency across the capital structure”.