Moody’s Gives Aaa Grades to Riskier CMBS on Loan Diversity

by LJ Miehe on June 9, 2010

Bloomberg – Moody’s Investors Service plans to grant top ratings to U.S. commercial-mortgage bonds with less investor protection and potentially riskier underlying loans than in the market’s previous sale.

Almost $609 million of securities being sold by JPMorgan Chase & Co. with so-called credit enhancement of 15 percent will get Aaa grades from the New York-based ratings firm. In this year’s only other sale of such debt, the amount of protection against the underlying loans’ losses, such as by having junior- ranked notes lose principal first, totaled 22.3 percent.

The latest securities contain mortgages that are larger in relation to the properties’ values and the amount of income from tenants. At the same time, the bonds will be linked to 36 different loans, compared with only six in an April sale by Royal Bank of Scotland Plc. The greater diversity is the main reason Moody’s is allowing the lower credit enhancement, according to Nick Levidy, an analyst at the firm.

“The benefit of diversity is very significant in that range” of difference in the amount of loans, Levidy said yesterday in a telephone interview.

That reasoning represents “exactly the same types of mistakes” made by ratings companies in assigning top grades to commercial- and residential-mortgage bonds later proven flawed as property markets collapsed across the country, said Donald van Deventer, chief executive officer of Honolulu-based Kamakura Corp., which sells risk-management software and advice to financial firms.


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