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

[Cate Long]

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

By Jody Shenn

June 9 (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.

Diversity Benefit

“The argument that diversity offers a huge benefit would work if you
were talking about flipping coins,” van Deventer said. “They act as if
real-estate moves around in an independent fashion.”

Since the credit crisis, Moody’s has “increased the correlation”
assumptions it uses, Levidy said. “All else being equal, it tends to
lower the diversity benefit.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1UFhryYHB6Y&pos=6