S&P rated a landmark CMBS deal that priced this week as the ratings agency came in from the cold following a two-year hiatus after allegations it misled investors. The company had been locked out of rating conduit commercial mortgage bond deals since June 2014, first by getting shunned in the marketplace and then formally with a one-year SEC ban.
Though the agency never admitted wrongdoing, it paid a US $77m fine and was barred from rating so-called conduit deals - the most lucrative part of the CMBS space - until January 2016. But it returned with a bang this week as one of four agencies hired to rate the groundbreaking "skin in the game" deal aimed at meeting new post-crisis, risk-retention rules.
It was the first deal packaging dozens of loans on hotels, malls, office buildings and other commercial property types that S&P had rated in more than two years. Lenders who offer this popular form of property finance are called "conduits" because their loans are quickly whisked into bond deals instead of being kept on their books. The CMBS, priced on Thursday by Wells Fargo, Bank of America Merrill Lynch and Morgan Stanley, securitized a pool of US $870.6m commercial property loans.
S&P declined on Friday to discuss how its return to rating conduit CMBS deals might affect its market share. When the ban was imposed in January 2015, SEC enforcement director Andrew Ceresney said "race-to-the-bottom behavior" persisted at rating agencies even after the financial crisis.
Even before the ban came into effect, the company had been struggling to garner much new business in the conduit space. In 2011 it abruptly pulled its ratings from a US $1.5bn Goldman and Citigroup conduit deal, and then overhauled its ratings model in mid-2012.
The SEC accused S&P of publishing a false and misleading "sales pitch" touting the strength of its revamped 2012 criteria, while allegedly lowering its standards to drum up more revenue. Thursday's deal came as regulators look to better align Wall Street banks that sell CMBS with investors who buy these securities. But the sector is struggling to generate business while clamping down on risks that, nearly a decade ago, helped spur the global meltdown - and brought CMBS financing to its knees.
"Clearly, S&P hasn't been on a lot of deals as our criteria standards require a combination of pool diversity and reasonable underwriter leverage," Darrell Wheeler, a CMBS veteran and now S&P's global head of structured finance research, told IFR. S&P said in a June report that it had reviewed, but was not hired to rate, 13 conduit deals in 2016. It pointed to credit metrics that have deteriorated significantly between 2013 and 2016, and leverage that has increased to 92.9% from 85.5%.
Moody's Investors Service, Fitch Ratings and Kroll Bond Rating Agency were also hired to rate the new risk-retention transaction. But unlike before the crisis, when investors received a few brief pages outlining a new transaction, this week's deal came with a 350 total pages of details from the four agencies. "We have our own internal models to determine ratings," said one portfolio manager. "But I do look through pre-sale for color on the pool and on the top ten loans [in the deal]. I do find that helpful."
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