Moody’s downgrades ten CMBS classes of BSCMS 2007

The Pak Banker - - Front Page -


Global rat­ing agency Moody’s down­graded the rat­ings of ten classed and af­firmed ten classes of Bear Stearns Com­mer­cial Mort­gage Se­cu­ri­ties. The downgrades are due to higher than expected re­al­ized and an­tic­i­pated losses from spe­cially ser­viced and trou­bled loans.

The af­fir­ma­tions of the pooled classes are due to key pa­ram­e­ters, in­clud­ing Moody’s loan to value (LTV) ra­tio, Moody’s stressed debt ser­vice cov­er­age ra­tio (DSCR) and the Herfind­ahl In­dex (Herf), re­main­ing within ac­cept­able ranges. Based on our cur­rent base expected loss, the credit en­hance­ment lev­els for the af­firmed classes are suf­fi­cient to main­tain their cur­rent rat­ings. The af­fir­ma­tion of the IO Class, Class X, is con­sis­tent with the credit per­for­mance of its ref­er­enced classes and is thus af­firmed.

Moody’s rat­ing ac­tion re­flects a base expected loss of 11.1% of the cur­rent bal­ance. At last full re­view, Moody’s base expected loss was 10.0%. De­pend­ing on the tim­ing of loan payoffs and the sever­ity and tim­ing of losses from spe­cially ser­viced loans, the credit en­hance­ment level for in­vest­ment grade classes could de­cline be­low the cur­rent lev­els. If fu­ture per­for­mance ma­te­ri­ally de­clines, the expected level of credit en­hance­ment and the pri­or­ity in the cash flow wa­ter­fall may be in­suf­fi­cient for the cur­rent rat­ings of these classes.

The per­for­mance ex­pec­ta­tions for a given vari­able in­di­cate Moody’s for­ward-look­ing view of the likely range of per­for­mance over the medium term. From time to time, Moody’s may, if war­ranted, change these ex­pec­ta­tions. Per­for­mance that falls out­side the given range may in­di­cate that the col­lat­eral’s credit qual­ity is stronger or weaker than Moody’s had an­tic­i­pated when the re­lated se­cu­ri­ties rat­ings were is­sued. Even so, a de­vi­a­tion from the expected range will not nec­es­sar­ily re­sult in a rat­ing ac­tion nor does per­for­mance within ex­pec­ta­tions pre­clude such ac­tions. The de­ci­sion to take (or not take) a rat­ing ac­tion is de­pen­dent on an as­sess­ment of a range of fac­tors in­clud­ing, but not ex­clu­sively, the per­for­mance met­rics.

Pri­mary sources of as­sump­tion un­cer­tainty are the ex­tent of growth in the cur­rent macroe­co­nomic en­vi­ron­ment and com­mer­cial real es­tate prop­erty mar­kets. Com­mer­cial real es­tate prop­erty val­ues are con­tin­u­ing to move in a pos­i­tive di­rec­tion along with a rise in in­vest­ment ac­tiv­ity and sta­bi­liza­tion in core prop­erty type per­for­mance. Lim­ited new con­struc­tion and mod­er­ate job growth have aided this im­prove­ment. How­ever, a con­sis­tent up­ward trend will not be ev­i­dent un­til the vol­ume of in­vest­ment ac­tiv­ity steadily in­creases for a sig­nif­i­cant pe­riod, non­per­form­ing prop­er­ties are cleared from the pipe­line, and fears of a Euro area re­ces­sion are abated.

The ho­tel sec­tor is per­form­ing strongly with eight straight quar­ters of growth and the mul­ti­fam­ily sec­tor con­tin­ues to show in­creases in de­mand with a grow­ing renter base and de­clin­ing home own­er­ship. Slow re­cov­ery in the of­fice sec­tor con­tin­ues with min­i­mal ad­di­tions to sup­ply. How­ever, of­fice de­mand is closely tied to em­ploy­ment, where growth re­mains slow and em­ploy­ers are con­sid­er­ing de­creases in the leased space per em­ployee. Also, pri­mary ur­ban mar­kets are out­per­form­ing sec­ondary subur­ban mar­kets. Per­for­mance in the re­tail sec­tor con­tin­ues to be mixed with re­tail rents de­clin­ing for the past four years, weak de­mand for new space and lack­lus­ter sales driven by dis­count­ing and pro­mo­tions. How­ever, ris­ing wages and re­duced un­em­ploy­ment, along with in­creased con­sumer con­fi­dence, is help­ing to spur con­sumer spend­ing re­sult­ing in in­creased sales. Across all prop­erty sec­tors, the avail­abil­ity of debt cap­i­tal con­tin­ues to im­prove with ro­bust se­cu­ri­ti­za­tion ac­tiv­ity of com­mer­cial real es­tate loans sup­ported by a mone­tary pol­icy of low in­ter­est rates.

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