Tuesday, July 17, 2012

Bloomberg states that new issue CMBS LTVs exceed 100%

Of course if you actually make it to the 8th page of Ms. Mulholland's Bloomberg article...
Lenders use a different formula to calculate a property’s value relative to loan size than Moody’s, resulting in a lower leverage ratio. On a $1.35 billion offering from Morgan Stanley and Bank of America Corp. sold last week, the issuers estimated the average office loan in the pool to be equal to 65.5 percent of a building’s value, compared with Moody’s 109.7 percent, according to the rating company’s assessment of the transaction.
So Morgan Stanley and Bank of America are using appraisals, and Moody's is basically making up a number. It should really just say that at the very top of the article. Moody's takes two numbers to estimate their version of the LTV for a property, stabilized income (so not actual current income, which is what is commonly used in CMBS 2.0 appraisals, and even many CMBS 1.0 appraisals) and higher cap rates then the current or even near-term projected cap rates. While I'm not so naive to believe that appraisals are always accurate. However, it is equally naive (at best) and potentially dangerous for Moody's to imply that this is an accurate accounting of value. Last year, they had the nerve to actually state the following:
In contrast, Moody’s LTV highlighted the growing credit risk late in CMBS 1.0 and is much more consistent with the now evident performance patterns of recent vintages.
So, they would have you believe they saw the storm coming, but continued to rate the bonds exactly the same despite believing that the vast majority IG-rated CMBS they put their stamp on was underwater and would likely be downgraded?

I do believe that Moody's Stressed LTV is useful in analyzing loans in a deal, but it should clearly be labeled as such. In papers specifically about the measure, they label it Moody's Stressed LTV, and highlight that it may be useful in identifying potentially overlevered properties within the confines of a model. But they also seem comfortable with allowing a reporter to publish articles such as the Bloomberg article above and frequently will just call it Moody's LTV.

1 comment:

crabsofsteel said...

I believe the stressing is now more severe than it was in 2007, but nevertheless if the stressed LTV in over 100, or even over 80, why assume the loan will payoff? The whole ratings process is screwy, in particular assuming that the bankruptcy-remote entity means you don't have to measure the borrower's credit. Ezra Beyman is as good a credit as GGP, in ratings-land.