Standard & Poor's issued a report stating that the rating agency expects additional downgrade risk for recently issued CMBS.
The report implied that the rating agency could possibly place deals on CreditWatch in the near term, which might be followed by rating actions.
In a report, Merrill Lynch analysts said that considering the Term ABS Loan Facility's (TALF) expansion to CMBS, and its reliance on ratings, the potential rating actions have taken on heightened importance in determining the value of triple-A CMBS securities.
The CMBS market widened on this news from S&P, although the spread move was comparatively subdued, according to Merrill analysts. The announcement, they said, is not surprising and they believe the market's reaction made sense.
Although the rating agency was very clear regarding its projected loss results, Merrill analysts thought that the information about the timing and severity of downgrades was less clear.
S&P's report said that the 2005 vintage will perform better, but it's still probable that it will have rating actions as a result of the stressed environment. By contrast, Moody's Investors Service's 1Q09 rating sweep ignored conduit deals before 2006, Merrill analysts cited. For 2007 deals, S&P's projected losses range from 0.5% to over 30%.
S&P's report was not clear whether any AM classes were at risk for immediate downgrade, according to Merrill analysts. The rating agency's projected losses seemed to indicate some would be downgraded or at least placed on CreditWatch.
Merrill analysts said that S&P's actions could impact the TALF eligibility of some AJ classes. Moody's 1Q09 ratings sweep removed the triple-A rating for many AJs from the 2006 and 2007 conduit transactions, Merrill noted, adding that S&P's rating action might end up finishing the job.
It could also affect the performance of the AJ tranches of CMBX, particularly the AJ.1 index, Merrill analysts said.