S&P Giving Higher Bond Ratings?

A recent study conducted for The New York Times by Commercial MortgageAlert has shown that Standard and Poor’s has consistently given higher ratings than its rivals on certain mortgage-backed securities. The NYT asserts that S&P has been giving top-flight ratings in an effort to win more business from underwriters, and it seems to be working. The agency tripled its market share in the first half of 2013. S&P, like its rating agency counterparts, was criticized for similar actions prior to the financial crisis, when it offered investment-grade ratings to subprime mortgage securities, making them appear less risky to investors. Earlier this year, the government filed a lawsuit against S&P, accusing the agency of relaxing its ratings methodology before the financial crisis to win more business. It seems that history may be repeating itself; last September, S&P made a change to the methodology used to rate bonds backed by commercial real estate mortgages. Since the change, S&P has been more likely than its counterparts to issue higher ratings to commercial real estate bonds. On half the deals rated by S&P since last September, S&P has given at least a portion of the deal a higher rating than the other agencies rating the same deal. Moody’s, on the other hand, has not given the highest rating to any deal in the last two years and Fitch gave higher ratings on only 8% of the deals it rated over the last year. At SNWAM, we have not relied on ratings agencies and have consistently conducted our own credit research. This study acts as a friendly reminder to “know what you own” and conduct your own credit research, as the inherently flawed rating agency model (issuers pay the agencies to rate their bonds) comes up short.