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IFR-Big three bond raters still hold sway over mortgage market
2015年1月30日 / 下午3点33分 / 3 年前

IFR-Big three bond raters still hold sway over mortgage market

NEW YORK, Jan 30 (IFR) - Call it old-school thinking but despite all the regulatory scrutiny and public slamming of the top three global rating agencies for their roles during the last real estate bust, their rating calls on the riskiest tranches of conduit commercial mortgage bond deals are still influential enough to impact pricing outcomes on transactions.

Just last week when two competing deals priced their D classes with a 20bp differential, issuers, investors and analysts said the difference was simply because one had a Triple B minus rating from the one of the main credit rating agencies, while the other did not.

“It’s certainly the easiest thing for market players to hang their hat on,” one issuer of the two trades said of the pricing disparities. “It shows us the preferences of investors, and we are in this market a lot.”

Simply put, the costs of doing business in the primary and repo markets for conduit commercial mortgage bond deals will be higher without a stamp of approval from one of the big three rating agencies - Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

The problem has being magnified on the riskiest bonds broadly being offered - namely the D class - where the act of securing an investment grade from the old guard rating agencies has become harder to come by.

When Morgan Stanley and Bank of America sold their US$1bn plus conduit a week ago, called MSBAM 2015-C20, the issuers did so with marks of Triple B minus and Triple B (low) from Morningstar and DBRS at the D class level.

Moody’s was also hired to rate the trade, but like most of the deals it rated in recent months, supplied letter grades only on the deal’s most bullet-proof Triple A and Aa2 securities.

So when Morgan Stanley’s US$50.2m D class priced at swaps plus 380bp, versus S+360bp for a similar US$70.65m bond from Deutsche Bank and Ladder Capital that had a Triple B minus rating from Fitch Ratings, market players reacted by saying that having a top-three firm on a deal still mattered.

That partly stems from decades-old investment criteria that required at least one major rating agency on a deal before certain investors were allowed to buy into a deal.

But because little has changed in the criteria even after the crash, newcomers to the rating agency arena like Kroll Bond Rating Agency or Morningstar are still absent from the ranks of approved firms.

“Documentation and technology tend to move relatively slow on that front,” one analyst said.

And in practical terms, that not only means some money managers will be barred from buying Triple B minus paper without the sign off from a major rating agency, but also that fast money accounts looking for leverage in the repo market will often be paying more.

Fast-money accounts are big buyers of Triple B minus paper from the conduits, and are known for levering up bonds on a 5.5% yielding D tranche to reach mid-teen returns.

“I don’t know what the delta is (on repo) terms for a Triple B minus with or without Fitch (or) Moody’s but I am sure it is something,” a portfolio manager said.

Credit Suisse, for one, does not differentiate between ratings from one of the big three or from a DBRS, Kroll Bond Rating Agency or Morningstar, a person familiar with the matter said.

But many of the large US investment banks do, he said, noting that most are known to charge more for deals without Triple B minus marks from Moody’s or Fitch.

WILLING AND ABLE

Fitch Ratings has stood alone for months as the only firm of the big three agencies willing, or able, to supply Triple B minus ratings.

Standard & Poor’s has been largely out of the picture since the crash, and just this month agreed to a one-year ban from rating any new US conduit deals as part of a settlement with regulators, who claimed the agency misled investors in six post-crash deals.

And while Moody’s has picked up the bulk of the slack, until this week, its views on anything just below the Triple A level have been absent on new-issues.

But any lingering doubts of Moody’s stance of credit quality deterioration has been cleared up in a searing report issued by the agency on Thursday, which stated that bonds rated Triple B minus by others are more akin to B1, or junk status, by Moody’s own metrics. [ID: nL1N0V827K]

“None of us really respect what rating agencies have had to say (since the crash),” a portfolio manager at a large money manager said in an interview following the report’s release.

“But this had people paying attention for the first time in years.”

He was not the only one keeping a close eye on what this all could mean for investors.

Darrell Wheeler, an analyst at Amherst Pierpont Securities, has been warning about the vulnerability of new-issue Triple B minus paper to downgrades and losses.

“If we go into a near-term recession, there is a real risk of losses at the Triple B minus level, and certainly there is concern from a downgrade perspective,” he said in an interview.

But even in a downgrade scenario, Wheeler says there are sharp consequences for holders of Triple B minus paper, as deals that initially printed at S+335bp on average in 2014 will quickly widen to S+550bp.

“That’s quite a kick in the pants.” (Reporting by Joy Wiltermuth; editing by Shankar Ramakrishnan and Jack Doran)

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