Wednesday, April 11, 2007

Moody's: "Conduit Loan Underwriting Continues to Slide - Credit Enhancement Increase Likely"

According to CRE/IPG, Moody's will start increasing subordination levels for CMBS transactions shortly.

This comes on the heels of Fitch stating last week that aggressive CMBS underwriting will lead to more defaults, drawing some parallels between current aggressive lending in the commercial sector with the ongoing subprime fallout (which I thought I linked here last week, but I guess not).

It said its increases, which would be meted out on a deal-by-deal basis, would amount to the equivalent of a half to a full ratings notch. A full ratings notch increase in subordination would mean that a deal's Baa2 bond class, which today would typically have a 4 percent subordination level, would face a 5 percent level - roughly today's requirement for a Baa1 bond.
Not all deals will be affected. "Well-diversified collateral pools, a substantial volume of investment-grade loans, and other strong features could still receive subordination levels similar to those granted during the first quarter."

So while the other ratings agencies played UN and just talked about it, at least Moody's is doing something about it... you've got to give them credit for that. Although I don't like it because it makes my job tougher, Moody's is the only agency hanging their heads out right now about an issue that all the agencies have weighed in on - the only one to risk their volume of rating assingments by actually changing their guidelines.

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