Wall Street banks including Morgan Stanley and Deutsche Bank AG slammed Standard & Poor's decision to suspend ratings on commercial mortgage bonds after finding a flaw in the review process.
S&P withdrew rankings it had assigned to a $1.5 billion offering from Goldman Sachs Group Inc. and Citigroup Inc., forcing the banks to scuttle the deal after it was placed with investors. It then yanked ratings on Freddie Mac's $1.19 billion deal that JPMorgan Chase & Co. and Wells Fargo & Co. sold earlier this month that has yet to be completed.
"The manner in which S&P took its action has severely eroded investor and issuer confidence in its ratings," Morgan Stanley analysts led by Richard Parkus in New York wrote in a note Thursday, referring to the Goldman Sachs and Citigroup transaction. "Such an event is unprecedented within the CMBS market."
S&P's decision is impeding bank efforts to unload mortgages they have accumulated for sale as securities and introduces new risks for debt tied to hotels, shopping centers and offices. The $700 billion market was already showing signs of strain as investors pushed back against new sales amid sovereign crises and looser underwriting standards.
"At this point, many may lose confidence in CMBS 2.0 and given everything else going on, it could not have come on a worse week," Deutsche Bank analysts Harris Trifon and Dave Zhou wrote in a report.
S&P is reviewing the application of its criteria for offerings that pool multiple commercial mortgages, the firm said in a separate statement. "The review was prompted by the discovery of potentially conflicting methods of calculation," of how income from the properties relates to their debt burden. Ed Sweeney, an S&P spokesman, said the firm had no further comment.
"Ratings are a condition precedent to closing and settlement," Goldman Sachs and Citigroup said in a joint statement. Tasha Pelio, a JPMorgan Chase spokeswoman, did not comment. Shelley Beason of Wells Fargo couldn't immediately provide comment.
The confusion may lead to a pull-back in originations in the near term, according to James Grady, a managing director at Deutsche Asset Management in New York.
