On July 21, Standard & Poor's published a criteria document outlining refinements it
made to its methodology for assessing the impact of losses and recoveries on
U.S. conduit/fusion CMBS.
Of the 3,382 conduit/fusion classes with ratings on CreditWatch negative following criteria
revisions the agency announced June 26 in the report U.S. CMBS Rating Methodology And Assumptions For Conduit/Fusion Pools, up to 74 classes might be affected by the July 21 refinement.
In particular, the refinement focused on the assumptions used related to the timing and application of losses and recoveries resulting from its triple-A rating scenario described in the June 26 criteria publication.
The refinement does not change any other aspect of the CMBS rating criteria, methodology, or assumptions. In fact, the aggregate loss levels produced by the triple-A stress scenario remain the same.
Within conduit/fusion CMBS structures, the performance of classes can vary, sometimes considerably, depending on the specific assumptions used. Based on further analysis and market feedback, S&P believes the modification to our assumptions better reflects what may occur during a severe economic downturn. The modification, which further differentiates the timing of losses
resulting from our 'AAA' term and maturity default tests, will also more fully account for the structural nuances of time tranching within the senior classes of CMBS transactions.
The change could possibly affect the ratings on some super-senior classes in recent-vintage deals that incorporate the concept of a crossover date, which is the point in time when the allocation of principal distributions to the super-senior classes change to pro rata from sequential.
This date happens when losses reach a certain level in the transaction. Even before the modification, S&P applied principal in accordance with transaction waterfall provisions. However, modifications in the timing of defaults and losses could have a considerable effect on the payment profile of senior securities, many of which receive principal sequentially before the crossover date. Further differentiating the timing of losses, even by a few months, can result in the same security potentially experiencing a full payoffor substantial loss.
The implementation of these changes resulted in the reversal of seven downgrades across three transactions that occurred last week. S&P does not anticipate any other ratings reversals as a result of this modification.
All CreditWatch resolutions will incorporate S&P's revised loss application criteria. The modification could have a positive impact on shorter weighted-average life triple-A ratings (less than 10 years), some of which may be affirmed.
Since the agency cannot definitively make this determination until it conducts a more complete evaluation and analysis of each deal, the rating firm's current CreditWatch placements are currently still unchanged. Of the ratings on the 3,382 conduit/fusion classes on CreditWatch following the June 26, criteria change, 74 represent shorter WAL 'AAA' classes.