Banks arranging a $1 billion commercial-mortgage bond deal tied to the Atlantis resort in the Bahamas are poised to skip Standard & Poor’s grades for most of the securities.
The ratings firm, which is facing a potential enforcement action by the U.S. Securities and Exchange Commission on commercial mortgage securities it rated in 2011, isn’t offering preliminary grades on $617 million of senior portions of the transaction, according to a presale report from New York-based S&P. DBRS Ltd. and Kroll Bond Rating Agency Inc. are offering rankings as high as AAA, according to a person with knowledge of the deal.
With bigger bond transactions, potential buyers often seek ratings from either S&P or Moody’s Investors Service, the two largest credit graders, because of the nature of their investment guidelines. S&P said it would have capped its ratings on the higher-ranking portions of the Atlantis deal at BBB+, the third-lowest investment-grade level, because of risks tied to the property being in the Bahamas.
“It’s somewhat unique in that you don’t have S&P and Moody’s on a deal rating” the AAA slice, Eric Thompson, Kroll’s head of commercial-mortgage securities, said in a telephone interview. “It is also indicative of our acceptance in the market.”
April Kabahar, a spokeswoman for S&P, didn’t provide further comment.
Bankers have been rethinking whether to hire S&P to rate commercial-mortgage bond deals after its parent, McGraw Hill Financial Inc., disclosed the potential SEC action on July 23, people with knowledge of the matter said last week. The regulator is probing six bond deals that S&P rated in 2011, including a $1.5 billion transaction that Citigroup Inc. and Goldman Sachs Group Inc. were forced to abandon when the firm yanked its grades after the notes were placed with investors.
Deutsche Bank AG, Morgan Stanley and Citigroup are managing the Atlantis offering. S&P may assign speculative grades to the debt it’s planning to rate, including a BB+ ranking to $104 million of the securities. DBRS and Kroll are set to grade those notes in the lowest investment-grade tier.
Scott Helfman, a spokesman for Citigroup, declined to comment, as did Oksana Poltavets of Deutsche Bank and Mark Lake of Morgan Stanley. Stephen Bernard, a spokesman for DBRS, didn’t immediately respond to an e-mail seeking comment.
Bond issuers are free to choose which credit raters they hire to grade their offerings, a practice known as ratings shopping. During the housing bubble that began to burst in 2006, that flexibility fueled a “race to the bottom” to avoid losing market share, the U.S. Senate’s Permanent Subcommittee on Investigations said in a 2011 report.
The Atlantis, a “widely recognized destination resort” on Paradise Island, benefits from its beachfront location and amenities including 39 restaurants and bars, a 63-slip marina, a 141-acre water park, casino, convention center, the Mandara Spa, and approximately 40,000 square feet of retail space, according to the S&P report.
At the same time, the firm’s grades on the bonds are tied to its sovereign ratings on the Bahamas, because of “risks related to repatriation, expropriation, and currency inconvertibility,” it said. The borrower obtained $800 million of political risk insurance to cover these dangers for the loan’s term, S&P said.
“The country has been fairly stable over the last few years and this property is very critical to the Bahamian economy,” Kroll’s Thompson said.