Moody's to review CMBS

Moody’s to Review $302.6 Billion in Commercial Debt (Update2)
Email Print A A A
By Sarah Mulholland

Feb. 5 (Bloomberg) -- Moody’s Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments.

The review encompasses 52 percent of outstanding U.S. commercial mortgage-backed debt ranked by Moody’s, the New York- based ratings company said today in a statement. The ratings of so-called senior and mezzanine AAA bonds, the top two classes of CMBS accounting for about 72 percent of the securities being reviewed, probably won’t be affected, Moody’s said.

The U.S. recession is crimping consumer spending and hurting business growth, making it harder for commercial property owners to make their payments. Should Moody’s decide to cut the ratings, investors including banks and insurers may need to sell CMBS holdings to maintain required levels of capital.

“Property values declined sharply in 2008, and we anticipate further declines over the next 12 to 24 months,” Moody’s analyst Nick Levidy said in the statement. “Delinquencies on CMBS loans are also on the rise, and we expect the pace to accelerate as macroeconomic pressures take a toll on property cash flows.”

Moody’s said it may downgrade the lowest levels of the securities by an average of four to five levels. Many of the securities are trading at levels that already suggest their ratings were lowered.

The gap, or spread, on commercial mortgage-backed bonds relative to benchmark interest rates has soared in the past year on concern that defaults will rise. Top-rated commercial real estate securities are trading at about 10.3 percentage points more than the swap rate, compared with 1.8 percentage points a year ago, Bank of America Corp. data show. The swap rate is currently 3.154 percent.

Fait Accompli
“This was already a fait accompli in the market,” said David Castillo, a senior trader of structured-finance bonds at Further Lane Securities in San Francisco.

Sales of the securities plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to JPMorgan Chase & Co. data.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net Last Updated: February 5, 2009 16:09 EST

Here we go. Review, Downgrade, Markdown, Bailout. Yee haw! The banks are insolvent dammit. Nationalize them and get this over with. Ofcourse game theory dictates that uncertainty on one hand makes things worse for the economy and on the other hand makes Treasury debt popular. Right now, the Treasury is focused on raising money for the Fed at cheap rates and therefore they'll try to keep certainty from coming back into the market. For now. At some point Obama has to make an executive decision here and say enough with the uncertainty - the damage that is being caused to "animal spirits" in the economy is unacceptable.