With the announcement from Standard & Poors earlier this week that triple A rated commercial mortgage backed securities (CMBS) may be downgraded due to deteriorating underlying conditions has sent risk premiums up significantly in the past several days.

Fears among credit investors have risen that threatened ratings downgrades of commercial property debt might thwart US government efforts to revive the markets that help fund office blocks, shopping centres and other commercial real estate.

Standard & Poor’s warned this week that it was likely to downgrade tens of billions of dollars in triple A securities backed by recent real estate loans – with 90 per cent of the securities backed by 2007 mortgages likely to face rating cuts.

The move took the market by surprise and triggered a sharp fall in the value of triple A rated commercial mortgage-backed securities. The ratings are important because the Federal Reserve said last week that its $1,000bn term asset-backed securities loan facility (TALF) could only be used in the CMBS market for securities that are rated triple A.

Investors now fear that triple A rated securities backed by commercial mortgages could end up seeing a cascade of rating downgrades, in an echo of the experience of securities backed by subprime residential mortgages.

According to Barclays Capital, the risk premiums, or spreads, on recent senior triple A rated CMBS have risen by more than 115 basis points this week. On Thursday they were trading at 835 basis points over benchmark rates, up from 720bp last week. A year ago, the spreads were 145bp.[...] Source: FT

Well ‘Timmy’, what ya going to do now?