S&P Begins to Roll Out Its CMBS Downgrades

I already did the round-up post for today, so I'm adding this as a single item. S&P first began talking about downgrading CMBS ratings in April. This triggered some rancor in early June. There was an excellent viewpoint from HousingWire on this around that time. There as another good look on June 29 at the implications of the move.

Bonds backed by commercial mortgages were hit Tuesday after Standard & Poor's downgraded several CMBS issues.

The CMBX Series 5, the most recent derivatives index based on bonds backed by commercial mortgages, was down by three points to 72 cents on the dollar, according to Derrick Wulf, a senior portfolio manager at Dwight Asset Management in Burlington, Vt.

S&P cut several of these securities because of a recent change in its rating methodology.

"They have put a lot of bonds on watch for downgrade after updating their methodology, and this is making the market nervous," Wulf said.

The GG-10 A4, a benchmark bond, has been downgraded multiple notches from the pristine triple-A to just a notch above junk status at triple-B minus, Wulf said. This comes while two other rating agencies, Moody's Investors Service and Fitch Ratings, haven't cut their ratings on the bond.

Wulf said the bond is trading about 100 basis points wider than its close of 675 basis points on Monday.

S&P intends to "roll out the results of their new methodology over the next three to six months," said Darrell Wheeler, head of securitization research at Citigroup, in a note to clients.


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