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S&P Commits Professional Suicide With Ratings Round Trip, Underlying CRE Remains Toxic Garbage

Tyler Durden's picture





 

Rare? Medium Rare? Medium? Well Done? S&P? Indeed, as the last peg in the gradation of burnt to a crisp, S&P smells completely done.  As in there isn't even left a shadow of a doubt that all S&P does is pander to the solicitations of whatever few remaining clients it may have, or, as the case may be, the U.S. government. Any credibility S&P, which one would be excused for confusing with Sycophantic & Pathetic, may have tried to salvage over the past 6 months has been gutted and left to dry after this most recent fiasco, which is the final straw on the McGraw-Hill subsidiary's expedited route to the NRSRO utterly discredited trash heap. From Bloomberg:

Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.

S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.

“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”

Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.

To recap: AAA to BBB- and back to AAA in one week. How many pieces of silver from disgruntled affected CMBS clients (or how many persuasive phone calls from the NY Fed) did it take for S&P to vomit in the face of the few remaining people who had been willing to give the rating agency one last chance at redemption? At this point, nobody cares, just as nobody will ever care again about any bullshit lettering this "rating" agency assigns as an indication of creditworthiness for any entity. For all intents and purposes, undertakers are now shoving S&P's shrivelled carcass deep into the bowels of the credibility morgue where it will remain forever entombed in an unmarked grave, with a final forensic assessment of professional suicide. As expected, nobody will shed any tears of mourning.

Amusingly, S&P's commercial real estate cowardice comes on the heels of a great report issued this morning by CreditSights' REIT analyst Craig Guttenplan titled "REIT 2Q Fundamentals: Protracted Pain Despite Gain." Craig writes:

  • CRE fundamentals for the core domestic property types continued their downward progression during the second quarter with vacancy rates rising and market rents declining as continuing job losses and other negative economic news weighed on both consumer and business sentiment.
  • Despite the weakening in fundamentals, REIT security prices have rallied strongly from the beginning of the second quarter to date on the sector’s re-equitization and deleveraging as well as the broader compression trade due to an improvement in overall credit market conditions.
  • The dramatic upturn in REIT equity during the second quarter underscores how operating fundamentals continue to be a secondary concern to the market’s primary driver of capital markets and liquidity.

And summarizes as follows:

Commercial real estate (CRE) fundamentals for the core domestic property types continued their downward progression during the second quarter. Vacancy rates rose and market rents declined on a national level across-the-board in retail, office, and multifamily as continuing job losses and other negative economic news weighed on both consumer and business sentiment. While this no doubt is negative for the CRE market, it is also not a surprise. CRE fundamentals notoriously lag the economic cycle with their severity and timing driven by how bad the downturn is and how long it lasts.

Surely this alone should be sufficient for S&P to upgrade every CMBS bond possible to AAA and even induct them into the "$1 million sponsor" AAAA club.

In an a dramatic example of what is known as fundamental analysis which in its many years of Simplistic & Parasitic existence S&P never quite got the hang of, Craig provides a very illuminating overview of what is likely the biggest cog in the REIT/CRE/CMBS wheels - expiring leases:

Going along with the consensus view for a near term bottoming of the economic downturn in late 2009 or early 2010, we envision an environment of deteriorating fundamentals that persists through sometime in 2012 or 2013. Given this expectation, we looked at the lease expiration schedule for our retail and office universe to see who is most exposed over this time frame. However, we would point out that the longer duration of these lease types (5-15 years) means that many expiring lease rates are not necessarily going to be significantly lower than when they were originally signed and in certain cases there may still be positive marks-to-market. That said, it is clear that significantly positive marks are no longer going to be the norm or there should at least be some moderation of positive marks relative to more recent periods. For those companies whose portfolios are currently fully marked, lower lease rates should impact revenues more immediately than those with still positive embedded marks.

 

 

Despite our expectations for a bottoming of CRE fundamentals in 2012 or 2013, we note that rental rates should remain at depressed levels for the subsequent few years relative to the recent boom period as fundamentals slowly strenghten. So even if a company has a small percentage of its leases rolling during 2009 through 2013, market rents in 2014 and 2015 will likely be lower than market rents in 2006 and 2007 as they recover from their lows. Additionally, while good diversification by most major REITs limits exposure to single tenants, tenant bankruptcies can speed up the lease expiration timetable and force space that was once considered occupied for the longer term back on the market. We note that disclosure around lease expirations can vary by company so our figures are based on what is most readily available in the companies’ quarterly financial supplements.

Needless to say, more reason to upgrade anything and everything that even remotely smells of CRE.

Zero Hedge's advice to Moody's: if you don't want to follow S&P into the NRSRO abbatoir, please run, don't walk to your nearest computer, purchase a CreditSights subscription, and read all of Craig's research pieces on REITs and CRE. Not only will you learn a lot, but you will hopefully avoid S&P's mistake. Alternatively, you can follow in their footsteps, clearing the path for Egan-Jones' unobstructed emergence as the only objective, unopposed, legitimate rating agency in the western world. We await your move with baited breath.

 


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Wed, 07/22/2009 - 01:58 | Link to Comment Anonymous
Wed, 07/22/2009 - 02:04 | Link to Comment GoldmanSux
GoldmanSux's picture

Hey Warren...just sayin'

McGraw Hill= Business Week= $1

Washington Post= Newsweek= $1, leaving the newpaper = NYT $900M mkt cap.  WPO mkt cap 3.6 Billion.

Sometimes sellin' something aint a bad idea.

Wed, 07/22/2009 - 02:05 | Link to Comment Anonymous
Wed, 07/22/2009 - 06:54 | Link to Comment Danz Gambit
Danz Gambit's picture

"Change we can believe in"  -  what a sad fucking pathetic joke that was

Wed, 07/22/2009 - 09:59 | Link to Comment Anonymous
Wed, 07/22/2009 - 10:08 | Link to Comment Bob
Bob's picture

We elected a brilliant, inspiring and well-meaning man who is in so far over his head on economic issues that it appears he can be lead by the nose by Wall Street without a clue.  Just keep giving the great Stand-Up rap, Barry . . .

Sad, sad, sad.   

Wed, 07/22/2009 - 02:08 | Link to Comment Anonymous
Wed, 07/22/2009 - 02:35 | Link to Comment Anonymous
Wed, 07/22/2009 - 08:46 | Link to Comment erich
erich's picture

Good Catch!

Wed, 07/22/2009 - 02:40 | Link to Comment Anonymous
Wed, 07/22/2009 - 10:12 | Link to Comment Bob
Bob's picture

It does seem that if it were relevant, the Big Three would be drowning in disrepute already.  Yet they have been installed by the Gov as the continuing authorities on risk . . .

Totally insane.   

Wed, 07/22/2009 - 02:42 | Link to Comment Assetman
Assetman's picture

My understading is that only 3 bond issuances are affected.  And how many did S&P downgrade last month?

Still, given the nature of these freshly "re-assumed" upgrades, I'm sure that others who weren't so lucky are wondering:

(a) who do I know that bondholder "X" knows (Tim Gaithner) that can help give me the same ratings boost?

(b) how much do I need to pay S&P for the pleasure of changing their assumptions on the timing of my bond's demise?

I mean, anyone can change their assumptions for a price now... can't they?

 

Wed, 07/22/2009 - 10:13 | Link to Comment Stuart
Stuart's picture

The fact that only 3 bond issuances were affected is not the point.   You just got delivered hard tangible proof of system aided and abetted fraud and evidence of what is now on the Fed's balance sheet is toxic crap.  The integrity of the TALF and other programs is now legitimately called into question.

http://market-ticker.denninger.net/archives/1248-BLATANT-Ratings-BS.html

 

Wed, 07/22/2009 - 12:20 | Link to Comment Assetman
Assetman's picture

Oh, I'm getting the point Stuart.

But isn't anyone curious what is actually contained in the 3 bonds, the parties involved, and the rationale on why S&P would change their assumptions for total toxic doom for these securities???

It's really easy to jump to conclusions (I suspect the same things as well), but I would rather ask S&P the questions and see them squirm while giving an answer.  And if they don't provide an answer, well, we can assume the worst.

I'm just wondering why nobody is asking the questions and placing S&P under the gun.

Thu, 07/23/2009 - 16:01 | Link to Comment Anonymous
Wed, 07/22/2009 - 03:32 | Link to Comment Anonymous
Wed, 07/22/2009 - 08:03 | Link to Comment Anonymous
Wed, 07/22/2009 - 03:34 | Link to Comment Anonymous
Wed, 07/22/2009 - 08:31 | Link to Comment Anonymous
Wed, 07/22/2009 - 08:47 | Link to Comment erich
erich's picture

Yep, don't take away the dream!  Realism is a bore!

Thu, 07/23/2009 - 03:36 | Link to Comment Anonymous
Wed, 07/22/2009 - 03:44 | Link to Comment Quantum Noise
Quantum Noise's picture

Wow... you would think that even if all their employees were bipolar they would have enough of them to better smooth out the output.

Can I get a job at S&P? It seems like a pretty cool job to me, since this indicates that they rate bonds on the weather, not after any sort of economic analysis. I bet their working day is from 10am to about 10:03 am.

Wed, 07/22/2009 - 04:35 | Link to Comment Anonymous
Wed, 07/22/2009 - 05:11 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

I think more of it as a convenient arrangement for the "favored parties" to sell whatever trash they want to the unsuspecting public by paying a small fee and getting it stamped "AAA"

Wed, 07/22/2009 - 04:44 | Link to Comment Anonymous
Wed, 07/22/2009 - 04:58 | Link to Comment Anonymous
Wed, 07/22/2009 - 05:52 | Link to Comment Anonymous
Wed, 07/22/2009 - 07:29 | Link to Comment Gilgamesh
Gilgamesh's picture

Actually, no one had to move anywhere.  If anyone doesn't know where S&P's HQ is, take a look.  Then refer back to the previous discussion about which important tenant happens to reside in the same building.  And who their neighbors are on two sides (and various others within spitting distance).  But I'm sure that proximity has Zero to do with anything.

Tue, 07/28/2009 - 11:59 | Link to Comment Anonymous
Wed, 07/22/2009 - 07:12 | Link to Comment Anonymous
Wed, 07/22/2009 - 07:29 | Link to Comment lizzy36
lizzy36's picture

You know the worst thing about this? nobody cares.

They are not even trying to cover up their blatant fraud anymore.  Why would they?

A bit of outrage, but seriously it is getting harder and harder to get it up for outrage over these things.

Who amongst us didn't expect S&P to capitulate on this issue so those CMBS in question would become TALF eligible.  It was never as question of "if" only "when".

I am not sure what the end game is  here. Self interest and preservation of the good ol' days in perputity (while the taxpayer bends over so frequently they are rendered incapable of standing erect)?

 

Wed, 07/22/2009 - 07:33 | Link to Comment Gilgamesh
Gilgamesh's picture

I think the TALF as it stands now is set to expire is Sept (maybe Dec?), and the application approval process takes months.  In the middle of the intense lobbying to get this extended, it seems that there might have been just a hint of pressure to move up the timetable on getting these back to AAA.

 

 

Wed, 07/22/2009 - 07:35 | Link to Comment lizzy36
lizzy36's picture

I beleive TALF for CMBS was extended out for 3 years.

Wed, 07/22/2009 - 07:58 | Link to Comment Anonymous
Wed, 07/22/2009 - 08:01 | Link to Comment Ruth
Ruth's picture

Love Egan-Jones, like a David against Goliath.  Yesterday in Congressional Oversight it was obvious Moody rep had no credibility.  Our only hope is Neil Barofsky, the Special Inspector General, which supposedly has many investigations going on.  I hope he prosecutes and gets the ball rolling the other way.  Does anyone know much about him?

Wed, 07/22/2009 - 08:01 | Link to Comment niamor
niamor's picture

Heck! What are they on about.  Talk about trying to fool all the people all the time.

 

-- TD great piece, although I dare to say the writing is a bit errr. lyrical... even bordering on the self indulgent:  "For all intents and purposes, undertakers are now shoving S&P's shrivelled carcass deep into the bowels of the credibility morgue where it will remain forever entombed in an unmarked grave". I had to read that one 3 times to figure out what you were on about!!

Hmmm on second thoughts, don't change anything.  That's part of the ZH brand now

Wed, 07/22/2009 - 08:49 | Link to Comment erich
erich's picture

Has anything like this ever happened?  They are not even stating it was a technical error, they changed their assumptions.

Wed, 07/22/2009 - 08:51 | Link to Comment curbyourrisk
curbyourrisk's picture

WE ARE T.O.A.S.T.!

The same piece of $hit companies that caused this mess will bring us full circle...to repeat the same mess.

End the ratings agenices now!!!!!

Wed, 07/22/2009 - 08:56 | Link to Comment aus_punter
aus_punter's picture

it would be funny if it weren't so sad

as long as fixed income buyers remain unable or unwilling to do their own work, sadly, the ratings agencies will always exist

Tue, 07/28/2009 - 12:03 | Link to Comment Anonymous
Wed, 07/22/2009 - 09:08 | Link to Comment Anonymous
Wed, 07/22/2009 - 09:12 | Link to Comment Bubby BankenStein
Bubby BankenStein's picture

There is a simple and insidious explanation:

Black Market Credit Enhancement

This is a replay of the AIG caper, except this time the taxpayer is writing the insurance.  The US Gov. is effectively writing CDS to protect the debt, and the Taxpayer pays the premium and takes the risk of loss.  Brilliant!

The rating agencies have been told to play.

Wed, 07/22/2009 - 09:22 | Link to Comment Undertaker (not verified)
Wed, 07/22/2009 - 09:47 | Link to Comment Anonymous
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