S&P says it has made mistakes in structured finance, where the top grade is now printed as AAA.sf following European rules in 2010 meant to warn investors that securitized-debt grades may be less reliable.
Two Approaches
The company said in July that it allowed a discrepancy to develop in how it rates commercial-mortgage securities. The issue came to light after investors objected to how much of a $1.5 billion deal planned by Goldman Sachs Group Inc. and Citigroup Inc. was set to get top grades.
After the banks restructured the deal to provide some AAA bonds with a loss buffer of 20 percent, rather than 14.5 percent, Goldman and Citigroup were forced to pull the offering when S&P withdrew its ratings.
S&P said it had been using the easiest of two approaches to calculate borrowers' income relative to required debt payments when rating new deals, while continuing to apply an average for outstanding bonds. The firm said it needed to review the "potentially conflicting methods."
The largest underlying loan was to be debt on the Park Place Mall in Tucson, Arizona, according to a document sent to investors. Borders Group Inc., the bankrupt book retailer that won court approval last month to liquidate its remaining 399 stores, occupies 5.6 percent of its rental space.
Wrong Downgrades
"Our pursuit of quality and comparability means that when we discover a material error in our ratings, we promptly review it and address the matter transparently," S&P's Sweeney said last week.
Not all inaccurate ratings are too high, according to Amherst Securities Group LP's Laurie Goodman, a member of the Fixed Income Analysts Society's Hall of Fame.
Of 156 home-loan bonds deemed unlikely to suffer any losses by Pimco in its reviews for insurance regulators that now rely on its assessments rather than those of the raters, only 94 retain investment grades from the firms that assigned them, she wrote in an Aug. 17 report.
S&P wrongly downgraded 32 mortgage bonds in April 2010 because it used "incorrect" estimates for the size of losses per foreclosure, the company said July 29. On Aug. 11, S&P said it wrongly withdrew ratings on almost $250 million of securities backed by home-equity credit lines a month earlier. Those were reinstated to AA+ because that is the rating on the debt's guarantor, a unit of Assured Guaranty Ltd.
'Incorrectly Analyzed'
That's also the same grade on the U.S. even though credit- default swaps show traders are pricing the insurer's odds of default over the next five years at more than 50 percent, according to Bloomberg data.