The U.S. Securities & Exchange Commission (SEC) recently issued a ban on Standard & Poor’s (S&P) in granting ratings for certain commercial mortgage-backed securities (CMBS), though the ban hasn’t disrupted its business at all.
In fact, according to Bloomberg Business, S&P doubled its CMBS business in the last quarter. The financial services company issued ratings to $8.7 billion’s worth of CMBS transcations in the first quarter this year, more than doubling its $3.9 billion mark from 2014’s first quarter and $7 billion mark from the previous quarter.
S&P was forced to pay more than $78 million in damages this January after the SEC charged the credit grading company with fraudulent claims and skewed rating criteria which the SEC claims were done to increase its business. Specifically, the SEC was outraged to find out that S&P failed to disclose changes of ratings criteria to investors. Citing the charges as a first for a major ratings company, the SEC also issued a one-year “timeout” to S&P, banning them from rating a certain kind of CMBS known as “conduit fusion,” which are generally larger and involve more investors than “single borrower” versions.
However, the ban hasn’t deterred S&P’s efforts in rating other kinds of CMBS transactions at all. Ironically, S&P has actually increased its business with the CMBS transactions, particular the single borrower versions, that they are allowed to rate. Some financial insiders cast doubt on the SEC’s true objectives with its ruling.
“It really does demonstrate how everything is all for show,” said Janet Tavakoli, founder of Chicago-based consulting firm Tavakoli Structured Finance, Inc. “The SEC just gives huge loopholes that you can drive a Mack truck through.”
S&P has declined to comment.
Credit-rating companies such as S&P use the “capitalization rate,” a ratio of the estimated net income of a property to the actual value of the property, to determine the ratings of CMBS transactions. However, S&P was accused of using lower capitalization rates to inflate the actual value of CMBS properties, thereby attracting prominent investors and banks on Wall Street.
Still, S&P had a relatively marginal presence in the CMBS transactions it is now not allowed to rate. The firm only rated 11% of conduit fusion CMBS deals in the last quarter of 2014 and just 7.2% in 2014’s first quarter.
“The settlement reached between S&P and the SEC will have very little impact on its business in 2015,” says Taylor W. Grace, Managing Partner, Midwest Capital Funding. “The company’s business in the last few years has been focused on rating single borrower transactions. They have obtained nearly a 70% market share in this segment since 2010. Alternatively, in the conduit fusion segment, S&P’s market share in 2014 dipped to just 16%.”