NEW YORK, Feb 5 (Reuters) - Moody's Investors Service said on Thursday the erosion in the U.S. economy would likely lead it to downgrade a raft of commercial mortgage-backed securities, including some rated Aaa, by March.
Moody's said it is conducting the review of ratings on $302.6 billion in CMBS to include deteriorating factors, such as property cash flows, that support debt payments. It also more than doubled the expected losses on CMBS made during the 2006-2008 lending heyday, to about 5 percent from 2 percent.
Ratings on the safest Aaa classes, about 72 percent of securities under review, should not be affected by adjustments made for stressed cash flows and capitalization rates, or the ratio of net income from the property to its value, it said.
But junior Aaa classes could be cut four or five notches, on average, Moody's said. Lower-rated bonds face downgrades of up to six levels below current designations, it added.
"The pace of decline in the economy has really altered our fundamental view of how commercial real estate will perform on a going-forward basis, so we thought a ratings sweep would be appropriate," said Michael Gerdes, a senior vice president at Moody's, said in an interview.
Moody's review shook the $700 billion market, and investors ramped up bearish positions on CMBS derivative indexes. Risk premiums on the CMBX-5 "AJ" index shot up about 160 basis points to a 1,730/1,760 basis point spread over its interest-rate benchmark, according to an investor.
Issuance of CMBS came to a standstill in 2008 as the credit crunch led investors to reduce risk on investments, especially real estate. Commercial real estate delinquencies are about 1 percent, compared with double-digits rates on many types of residential loans, but sharp job losses and drops in consumer spending in the United States are expected to reverberate through the sector through 2010.
http://in.reuters.com/article/marketsNewsUS/idINN0538668220090205
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