Upgrades Outpace Downgrades for CMBS.(Commercial Mortgage Backed Securities)(forecasts of securities industry)

Two credit rating agencies are both seeing upgrades on commercial mortgage-backed securities loans exceed downgrades so far this year, pointing to continuing strength in the economy.

Moody's Investors Service reports that CMBS turned in a "steady performance" during the first half of 2004, with 231 confirmations, 113 upgrades and 112 downgrades on 456 tranches.

The rating agency's Moody's Surveil-lance Trends scores show that "the vast majority of fixed-rate investment grade CMBS tranches [77%] should remain relatively stable for the near term, while investment grade upgrades should continue to exceed investment grade downgrades."

In the second quarter of 2004, Moody's-rated floating rate transactions saw the largest portion of downgrades at 29 tranches from seven deals, the rating agency reports.

Tad Philipp, Moody's managing director for CMBS, said, "Floating-rate bond performance was weakened by poorly performing properties." Moody's reviewed 10 conduit transactions totaling 97 classes during the second quarter and 26 of these were upgraded.

Mr. Philipp said, "Three conduit transactions experienced both upgrades of the senior classes and downgrades of the junior classes, with the downgrades stemming from an increased share of specially serviced or high loan-to-value loans."

Moody's also reports rising CMBS "loan leverage and declining structural protections," with as many as 28% of loans showing 100% loan-to-value ratios based on Moody's valuations.