RBS reported that Standard and Poor’s Rating Services (S&P) announced on July 27 it will not currently assign ratings to U.S. conduit CMBS transactions, including the most recent $1.5-billion CMBS transaction offered by Goldman Sachs Group Inc. and Citigroup, Inc. that was scheduled to close on July 28. The action stunned the CMBS market and caused Goldman and Citi to pull their transaction. S&P said it is reviewing its criteria for CMBS and can’t provide a rating, presumably until its review is complete.
“Ratings are a condition precedent to closing and settlement,” Goldman Sachs and Citigroup said in their joint statement. “Standard & Poor’s had previously informed Goldman and Citi that it was prepared to rate the transaction.”
“S&P is reviewing the application of our conduit/fusion CMBS criteria in relation to the calculation of debt-service coverage ratios,” the risk assessor said in a statement. ”The review was prompted by the discovery of potentially conflicting methods of calculation.”
The action appears to be related to the relatively low subordination levels of 14.5% awarded to the triple-A senior classes of the Goldman/Citi transaction. This compares with subordination levels of 17%-21% for other multi-borrower transactions since the revival of CMBS issuance in April 2010. Investors noted no significant difference in the credit quality of the collateral loans that would warrant the lower subordination levels awarded by S&P on the Goldman/Citi transaction.
Goldman and Citi attempted to salvage the deal by creating a super-senior portion of bonds with 20% subordination and a junior triple-A class with the original 14.5% subordination. This restructuring became moot when S&P pulled the rating altogether.
Now Goldman and Citi are trying to regroup on their deal. One possibility is to have the deal rated by Moody’s. Another is to include the collateral in another offering being teed up by other conduit shops. Despite the outcome, the situation is another setback for the CMBS market recovery.