S&P Cautions About CMBS/CDO Trends

Standard & Poor's Ratings Services has expressed concern about trends in the U.S. commercial mortgage-backed securities and collateralized debt obligation market that it says could result in higher risk to investors.Among the trends S&P warns about are: a downslide in underwriting and origination standards for commercial mortgage loans; lowering of requirements for capital expenditures, tenant improvement, and leasing commission reserves; more loans that have an interest-only component, either for their entire terms or for an initial period; loans with inadequate ability to service debt that also don't have enough initial interest reserves; and loans secured by "esoteric" collateral and construction loans. The rating agency also cites "a changing CMBS landscape" -- one characterized by "increased liquidity, fierce competition among loan originators, an influx of new buyers, and a CDO-focused short-term mindset" that has significantly altered the supply/demand dynamics in the marketplace -- that could make transactions more vulnerable to negative credit events. S&P said it expects U.S. CMBS issuance volume to remain stable this year, barring unexpected events or a rise in interest rates. The rating agency can be found online at http://www.standardandpoors.com.