Moody’s Blasts Commercial-Mortgage Bond Offering It Didn’t Rate
Moody’s Investors Service cautioned investors on risks in a commercial-mortgage bond deal from JPMorgan Chase & Co, the first such transaction the rating company didn’t grade since at least August 2011.
The rankings on two investment-grade portions of the $1 billion deal sold by the lender Sept. 27 are too high because they don’t include a sufficient cushion against losses, Moody’s said in a report today. One of the classes would likely garner a speculative-grade ranking from the New York-based rating company, Moody’s said.
The offering was the first deal rated by Moody’s competitor Standard & Poor’s since that rater derailed a $1.5 billion sale by Goldman Sachs Group Inc. and Citigroup Inc. last year by pulling its grades on the securities. JPMorgan selected S&P to grade its deal after the company, seeking to regain market share, completed an overhaul of methods for analyzing bonds linked to skyscrapers, shopping malls and hotels last month.
Moody’s analyzed six of the retail properties that account for 17 percent of the pool from JPMorgan, finding that four of the loans are backed by properties outside of major markets, where rents and occupancies are more stable. Loans on malls backing the deal have high tenant concentrations and upcoming lease expirations, the report said.
“Not a single one of these loans merits investment-grade consideration, whether on a standalone or a diversified-pool basis,” Moody’s analyst Tad Philipp wrote in the report.
Fitch Ratings, DBRS Ltd. and Kroll Bond Ratings Inc. also graded the transaction, according to data compiled by Bloomberg.
“We stand by our ratings and our analysis of the transaction,” April Kabahar Emspak, a spokeswoman for S&P in New York, said in a telephone interview. Elizabeth Seymour, a JPMorgan spokeswoman, declined to comment.
Moody’s has altered the way it assesses the weakest mall loans packaged into commercial-mortgage backed securities to compensate for a growing number of shopping centers that may struggle to survive.
After seeing an increase in mall loans packaged into bond deals that raised concerns about the properties’ long-term viability, Moody’s said it will account for potentially greater losses for such debt, according to a June 7 report. That means the deals could be less profitable for underwriters.
Ranking structured products such as CMBS and collateralized debt obligations is one of the most lucrative areas for ratings companies. They generally charge between $1 million and $2 million to grade a CMBS deal, according to a September paper by Andrew Cohen, a researcher at the Federal Reserve.
During the U.S. housing boom, Moody’s, S&P and their competitors pushed to win business by providing inflated ratings for risky mortgage bonds, according to the Financial Crisis Inquiry Commission and a Senate report last year. That allowed pension funds and other ratings-sensitive investors to pack their portfolios with bonds that later plummeted in value.
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