Flood of CMBS Rating Cuts Coming

Standard and Poor’s (S&P) pre-announced that it will cut ratings on CMBS debt on a “large scale” in the next few days. The rating agencies are one of the biggest reasons why we are in the mess we are in – they were tasked with rating the debt which has blown up in the face of investors, and so far seem to continue their business as though nothing has happened.

S&P and Moody’s began cutting CMBS debt late last year, but in my mind they were way too late to begin with. Now, they are cutting additional debt ratings, and even on what was sold as the highest grade AAA grade debt.

Almost no debt which was issued in 2006 and 2007 should have ever received a rating of AAA. The rating agencies need to be taken to task for their part.

Regardless, the risk of downgrades is what has partially been responsible for the widening spreads on CMBS debt. An invenstor may enter what is a AAA bond today, but at the drop of a hat the ratings could be cut a few nothces as mortgage default rates continue to soar, and economic conditions deteriorate. And since commercial real estate is a lagging indicator, we likely have at least 2-3 quarters post-bottom until things start to stabilize for CMBS.

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