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What does an A rating mean anymore?

November 22, 2010

This morning I was reviewing a NNN leased investment in Memphis Tennesee. My folks are considering trading their apartmetn building for this type of investment because they still get monthly rental income but they don’t get all the maintenance and personality issues that they do with apartments.

On the flip side, my clients would be trading their 32 renters for 1 corporate tenant.  If the market should shift or if the company got sued, the entire burden of the lease and underlying mortgage payments could shift back onto my clients. The underlying lease is secured by the company and the company is an “A” rated company but, after the CMBS drama with AAA rated bonds, it got me wondering if I can really rely upon this “A” rating.

During the credit melt down starting in 2007, AAA rated mortgage backed securities were quickly devalued to junk bond status resulting in the the $638 Billion dollar bankruptcy by Lehman Brothers and a snowballing bank default that continues. As recently as Friday the 19th 3 banks failed.

In retrospect, the bankers trusted the AAA rated securities but all the AA rating means is that their history is good. Historically there has not been a default. According to Wikipedia, a AAA rated muni bond has historically had a 0% default rate and we used this as gospel. Unfortunately, this rating can not predict the future and, unfortunately again, there is no guarantee.

That’s the thing about investments, the higher the return, the higher the risk.

One Comment leave one →
  1. November 23, 2010 5:15 am

    Depending on the interest of your folks trading into a NNN investment could be a great idea! If there goal is to eventually move away from dealing with tenants and maintnence on the apartment building the NNN would do exactly that, as you mentioned. I think they could pretty easily find an investor who would take this NNN from them and give them a note for their equity. This way they would have extremely passive income and an interest bearing piece of paper that was secured by the commercial building!

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