Rating agencies in the below investment grade commercial mortgage-backed securities market

Abstract

As the assigners of credit ratings and subordination levels, rating agencies play a critical role in the whole CMBS market. In an effort to investigate their influence in this market, we analyzed the business models, industry structure and rating methodologies of rating agencies. In addition, their functions in the capital markets and CMBS markets are discussed. These findings are then applied in an attempt to explain the variations of subordination levels. We found that rating agencies play a significant role in the below investment grade CMBS market, mainly through their evolving credit assessing methodologies. However, rating agencies' business models and structure of the CMBS rating industry are not considered to have significant impact on subordination level decisions. It is found that most of the variations in the subordination levels can be attributed to non-rating agency factors such as change in CMBS pool compositions, change in CMBS loan structures and increasing scrutiny from the Below Investment Grade buyers.