06/08/2012

Redwood Warms Back Up to Moody’s, S&P

Redwood Trust is thinking about hiring Moody’s and S&P to rate its next mortgage-bond deal, signaling a possible end to years of tension between the companies.

While Redwood has remained an active issuer, a souring relationship with Moody’s led the Mill Valley, Calif., REIT to exclude the agency from grading its four most recent deals. S&P, meanwhile, has been out of the mix for five straight issues.

That could change with a $500 million transaction that Redwood plans to bring to market in the next three or four weeks. In preparation for the deal, company officials have been meeting with Moody’s, S&P, Fitch, DBRS and Kroll about potential rating assignments — stirring up talk among industry players that the mandate could go to Moody’s or S&P, or both.

In fact, it’s possible that all four agencies could work on the offering. Fitch has graded Redwood’s past four deals, with Kroll joining it on the last two, and indications are that the issuer wants to maintain relationships with each of the shops.

However, it’s the discussions with Moody’s and S&P that are gathering the most attention. That’s because many institutional investors won’t buy bonds unless they’re graded by at least one of the two agencies — a condition whose effect is magnified given Redwood’s status as one of the only issuers of fresh mortgage bonds in the U.S.

The last Redwood deal with ratings from both Moody’s and S&P was a $164.9 million issue that priced in August 2007. That also was the last time S&P won an assignment from the company, which subsequently paused its issuance program during the worst of the financial crisis.

When Redwood returned with a $211.2 million issue in April 2010, it engaged only Moody’s to rate the securities. Since then, it has worked exclusively with Fitch and Kroll.

Moody’s absence stemmed from a dispute that emerged as Redwood prepared for a $295.4 million transaction in February 2011. Citing high levels of risk that earthquakes could damage the underlying homes, Moody’s insisted on subordination levels that Redwood found unpalatable. At the same time, Fitch was willing to award a triple-A grade to the deal with less subordination and wound up winning the sole rating assignment.

Moody’s followed with a report that criticized Fitch’s evaluation, which Redwood apparently viewed as a cheap shot. For its part, Redwood has publicly characterized the back-and-forth as just a minor disagreement, and insists that it has maintained an open dialog with all of the rating agencies. But market players say the company continued to hold a grudge until now.

What happened with S&P is less clear. While the two sides remained in contact in recent years, sources said Redwood was turned off by what it viewed as an overly labor-intensive review process. Now, it seems Redwood is eager to work with S&P in the wake of a restructuring of the agency’s mortgage-bond rating team in February. That unit now is led by Vandana Sharma, while predecessor Becky Cao has moved to another area.

It also helps that S&P rated Credit Suisse’s most recent mortgage-bond transaction. That $729 million issue priced March 29. Redwood has completed two securitizations so far this year, most recently placing $327.9 million of bonds on March 28.

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