Fitch: Hurricane Sandy Not Expected to Have Significant Ratings Impact on U.S. CMBS
Although it is much too soon to accurately assess the full effect of Hurricane Sandy on U.S. CMBS, Fitch Ratings is in the process of gathering preliminary information on the impact of the storm. It may take some time to collect a definitive list of damaged properties given the lack of power and size of the affected areas. CMBS loan defaults, including in CMBS 2.0, could rise as early as the November 2012 distribution date. Many of the loan defaults will be temporary as power and connectivity issues are resolved. However, it may take some time to resolve these loans if borrowers with property damage experience delays in receiving insurance proceeds, making repairs and resuming operations.
Once damage status reports are received, those transactions where the impact of the storm is concentrated may be at risk of future downgrades if Fitch believes the borrowers lack the wherewithal to get the properties performing again. However, Fitch does not expect significant rating actions as most commercial properties maintain property/casualty insurance, windstorm insurance, and 12 to 24 months of business interruption insurance, along with some properties that have certain amounts of flood insurance coverage. Fitch will continue to monitor all available information and update rating actions as necessary.
Fitch has contacted the largest master servicers and requested initial information on the affected properties. Preliminary lists are expected late this week and early next week. FEMA continues to update the number of affected counties and as damage reports are received from borrowers these lists will be added to over time.
The damage is expected to be significant given the size of the affected area, from the Mid-Atlantic region, the Northeast and to the Great Lakes, as well as the geographic concentration in CMBS of these states and large cities along the Eastern Seaboard. Most commercial properties have windstorm, flood and business interruption insurance which may cover the costs of damages. EQECAT, Inc.'s, a disaster and risk-modeling firm, most recent insurance loss estimates are between $10 billion to $20 billion, with economic damages of approximately $30 billion to $50 billion. While many lines of insurance will be affected, there is a potential for significant business interruption claims related to flooding as the affected areas work to restore power and resume operations. See Fitch's release titled 'Sandy Flood Losses May Cause Big Business Interruption Losses' dated Oct. 30, 2012 and 'Widespread Flooding Makes Ultimate Sandy Losses Uncertain', dated Nov. 1, 2012 for more details. Details on insurance coverage and ongoing assessment on the length of time for areas to recover will be part of Fitch's ongoing analysis of these transactions.
Additional information is available at 'www.fitchratings.com'.
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