Friday, June 26, 2009

There Goes The CMBS Neighborhood

Just when you thought S&P had received the Rattner-Emanuel tag-teamed phone call on their CMBS insurrection, they come out with this:

In a nutshell - the rating agency announced that it was likely to downgrade $235.2 billion in CMBS securities as it evaluates how these would fare in an "extreme economic downturn." And, as a reminder for those who may be confused why in a week the Fed will change inclusion criteria for CMBS in the TALF, Bloomberg does a good recap:
If the securities backed by hotels, shopping centers and offices lose their top-ranked status, they’ll be excluded from the Federal Reserve’s $1 trillion Term Asset-Backed Securities Loan Facility, a setback for the government’s efforts to jumpstart lending. S&P expects to finish the review of the debt over the next three to six months, the company said.
Granted, Obama would never let that happen as that would put a major roadblock on the "Hope for an S&P" at 10,000 campaign.

Anyway, here are the main observations by S&P in their CMBS update report:

Some key findings of our analysis are as follows:
  • The projected impact is most significant on recent-vintage (2005-2008) CMBS. The percentages of 'AAA' classes—including 30%-enhanced classes ("super-dupers"), 20%-enhanced classes (AMs), and junior 'AAA' classes (AJs)—from these vintages that will likely be downgraded are 30% for 2005, 45% for 2006, 65% for 2007, and 60% for 2008, significantly higher than the levels for pre-2005 vintages, which will likely experience significantly fewer 'AAA' downgrades. [translation: Vinny, I am a size seller of a boatload of 2007 AAAs... hit the bid all the way down]

  • Transactions from the 2007 vintage will likely experience the most significant rating changes. Approximately 50% of super-duper 'AAA' tranches may experience downgrades. The weighted average rating of the downgraded classes would fall to 'A-'.

  • 10% of 2005 vintage super-duper classes would likely be downgraded to a weighted average rating of 'AA-', and 25% of 2006 vintage super-duper classes would likely be downgraded to a weighted average rating of 'AA-'.

  • 10-year super-duper classes have a higher potential for downgrades than those with a shorter weighted average life. As shown in table 1, 20% (2005), 60% (2006), and 95% (2007) of the 10-year classes are at risk of downgrades; these percentages far exceed the percentage of shorter-life classes susceptible to downgrades in their respective vintages.

  • The weighted average rating for the AM classes from the 2005-2008 vintages generally would likely be lowered to the 'A' and 'BBB' categories, and approximately 50% of the AJ classes would retain investment-grade ratings.
And this is what the pain will look like in detail:

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