S&P cuts may split CMBS market, not undo TALF - RBS

By Al Yoon

NEW YORK, June 9 (Reuters) - A Federal Reserve program to boost lending in U.S. commercial real estate can survive potential credit ratings downgrades on commercial mortgage-backed securities, though on a smaller scale than envisioned, Craig Sedmak, a managing director in CMBS trading at RBS Securities, said on Tuesday.

Sedmak's comments come after Standard & Poor's shocked the $700 billion CMBS market this week by advising that a vast amount of top-rated bonds face ratings downgrades based on a proposed change in rating models.

The cuts are seen as a threat to the Fed program since the central bank currently requires the bonds carry only "AAA" designations to protect its interests.

Commercial mortgage backed securities (CMBS) are the latest asset class to be made eligible for the Fed's Term Asset-Backed Securities Loan Facility (TALF), which aims to boost lending by offering funding to investors to buy bonds that finance loans.

Since March, TALF has seen some success in countering the financial crisis of the past year by lowering borrowing costs and boosting availability of auto and credit card loans.

S&P last week said its proposal to make its models more conservative would likely prompt ratings cuts on 95 percent of top bonds issued during the peak of the real estate cycle in 2007, and 85 percent of CMBS from 2006. The rating agency is accepting feedback from the industry through today.

"There are still all sorts of bonds that qualify," Sedmak told reporters after a panel hosted by the Commercial Mortgage Securities Association in New York.

But "all you do is bifurcate the market, and let S&P be the factor," he added. "That's the scary part."