By Nancy Leinfuss
NEW YORK, July 14 (Reuters) - Ratings downgrades to billions of dollars worth of commercial mortgage-backed securities on Tuesday threatened to undermine a U.S. program aimed at salvaging a sector that has been ravaged by the credit crisis.
Standard & Poor's ratings cuts on bonds issued by Goldman Sachs, JPMorgan Chase, Credit Suisse, Wachovia Bank and Morgan Stanley, created a leaner pool of eligible securities under the Federal Reserve's emergency loan program, the Term Asset-Backed Securities Loan Facility, or TALF.
The program will be launched on Thursday and aims to revive the CMBS market that finances office, retail and apartment buildings.
As news of the downgrades rippled through the market, spreads on CMBS reversed their narrowing trend and moved wider, traders and investors said.
'I'd say about 1/3 of the bonds out there that would have been eligible are now unlikely to be going forward. For the most part, your seasoned bonds and your real short bonds are ones that will likely remain eligible now,' said Bill Bemis, portfolio manager of structured products at Aviva Investors.
Some of the downgrades were severe. Goldman Sachs for example, saw five of its AAA classes from a 2007 transaction cut to BBB-minus. Two of its AAA classes were cut to BB and B-plus.
Goldman earlier reported stronger-than-expected quarterly earnings, but included a loss of about $700 million on commercial mortgage loans for the period. For more on Goldman's earnings, see
The Fed's two part program, which offers loans against new and old commercial mortgage-backed securities in a bid to draw investor demand and lower borrowing rates, mandates that bonds carry only stable AAA ratings, which is eliminating a huge chunk of the $700 billion market.
The rating requirement became a divisive issue after S&P, one of the four major raters of CMBS, adopted more conservative models that put many top-rated bonds at risk of downgrade. Some 1,500 ratings were added to S&P's list of potential downgrades last week.
'The S&P downgrades are weighing on the CMBS market today and spreads have been pushed wider,' said a debt trader.
Risk premiums on top CMBS since mid-June have hovered in a narrow range near 700 basis points above a common interest rate benchmark. Yield spreads soared above 900 basis points as S&P first proposed its ratings models, but dropped back amid dealer demand for issues they were restructuring for investors.
Lower financing costs are key to slowing the deterioration of credit for commercial loans that are heading into distress at a heady pace. Without easier credit, defaults will rise and prolong a vicious cycle of foreclosures and price declines.
The Fed said last week bonds eligible for TALF must have trade dates of July 2 or later, further narrowing eligibility.
'It's going to be interesting to see what participation we get here over the next couple of days, mainly because the Fed put in this (date) stipulation and it doesn't seem like a lot of trading happened until that point,' said Bemis.
A poor response to CMBS TALF would compare with success on the Fed's TALF for consumer borrowing sectors, which has lowered financing for financial companies making credit card, auto and student loans.
Bemis expects to see a fairly muted response to new issue CMBS TALF and expects to see more activity on the legacy side of the securities program in the coming month as terms are clarified.
'There's still the big question mark, as far as the Fed leaving themselves some wiggle room to perform valuations on each of the bonds themselves, in terms of what will be accepted or rejected by the them. I think you'll see some hesitancy in July and some more participation in August,' the manager said.
(Additional reporting by Al Yoon) Keywords: CMBS S&P/DOWNGRADES (Reuters Messaging: nancy.leinfuss.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, July 14 (Reuters) - Ratings downgrades to billions of dollars worth of commercial mortgage-backed securities on Tuesday threatened to undermine a U.S. program aimed at salvaging a sector that has been ravaged by the credit crisis.
Standard & Poor's ratings cuts on bonds issued by Goldman Sachs, JPMorgan Chase, Credit Suisse, Wachovia Bank and Morgan Stanley, created a leaner pool of eligible securities under the Federal Reserve's emergency loan program, the Term Asset-Backed Securities Loan Facility, or TALF.
The program will be launched on Thursday and aims to revive the CMBS market that finances office, retail and apartment buildings.
As news of the downgrades rippled through the market, spreads on CMBS reversed their narrowing trend and moved wider, traders and investors said.
'I'd say about 1/3 of the bonds out there that would have been eligible are now unlikely to be going forward. For the most part, your seasoned bonds and your real short bonds are ones that will likely remain eligible now,' said Bill Bemis, portfolio manager of structured products at Aviva Investors.
Some of the downgrades were severe. Goldman Sachs for example, saw five of its AAA classes from a 2007 transaction cut to BBB-minus. Two of its AAA classes were cut to BB and B-plus.
Goldman earlier reported stronger-than-expected quarterly earnings, but included a loss of about $700 million on commercial mortgage loans for the period. For more on Goldman's earnings, see
The Fed's two part program, which offers loans against new and old commercial mortgage-backed securities in a bid to draw investor demand and lower borrowing rates, mandates that bonds carry only stable AAA ratings, which is eliminating a huge chunk of the $700 billion market.
The rating requirement became a divisive issue after S&P, one of the four major raters of CMBS, adopted more conservative models that put many top-rated bonds at risk of downgrade. Some 1,500 ratings were added to S&P's list of potential downgrades last week.
'The S&P downgrades are weighing on the CMBS market today and spreads have been pushed wider,' said a debt trader.
Risk premiums on top CMBS since mid-June have hovered in a narrow range near 700 basis points above a common interest rate benchmark. Yield spreads soared above 900 basis points as S&P first proposed its ratings models, but dropped back amid dealer demand for issues they were restructuring for investors.
Lower financing costs are key to slowing the deterioration of credit for commercial loans that are heading into distress at a heady pace. Without easier credit, defaults will rise and prolong a vicious cycle of foreclosures and price declines.
The Fed said last week bonds eligible for TALF must have trade dates of July 2 or later, further narrowing eligibility.
'It's going to be interesting to see what participation we get here over the next couple of days, mainly because the Fed put in this (date) stipulation and it doesn't seem like a lot of trading happened until that point,' said Bemis.
A poor response to CMBS TALF would compare with success on the Fed's TALF for consumer borrowing sectors, which has lowered financing for financial companies making credit card, auto and student loans.
Bemis expects to see a fairly muted response to new issue CMBS TALF and expects to see more activity on the legacy side of the securities program in the coming month as terms are clarified.
'There's still the big question mark, as far as the Fed leaving themselves some wiggle room to perform valuations on each of the bonds themselves, in terms of what will be accepted or rejected by the them. I think you'll see some hesitancy in July and some more participation in August,' the manager said.
(Additional reporting by Al Yoon) Keywords: CMBS S&P/DOWNGRADES (Reuters Messaging: nancy.leinfuss.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.