The Securities and Exchange Commission today announced that they had settled with Standard and Poor’s (S&P) on charges of fraudulent misconduct in rating commercial mortgaged backed securities (CMBS) post credit crisis. According to the settlement, S&P will not be rating multi-loan (conduit) CMBS transactions until January 21, 2016, due to applying different methodologies to issue preliminary ratings and surveillance of these transactions back in 2011. However, S&P, will continue to rate all other type of CMBS transactions and will continue to monitor and maintain rating on previously rated CMBS transactions.
S&P will pay $58 million to the SEC in fines for their misconduct and an additional $19 million to settle with the Attorney General’s offices of New York and Massachusetts. They also agreed to retract a “misleading” study they had published supporting their methodologies based on flawed and inappropriate assumptions. The SEC claimed that the study did not completely describe certain aspects of the criteria in the study.
We believe the restriction on S&P from rating any future conduit CMBS transactions will have minimal impact on the CMBS market as S&P’s rated only 3 out of 40 or 9% of the market in 2014. The SEC’s action of banning S&P also supports our CMBS outlook that conduit CMBS underwriting has been and continues to be of average quality. We continue to monitor and remain cognizant of the risks in the current CMBS market. AAM continues to prefer single asset transactions with lower leverage relative to conduit transactions.
Structured Products Analyst