Hurricane Sandy: 'minimal' effect on CMBS.


Though Hurricane Sandy damaged an area that creates 13 percent of U.S. Gross Domestic Product (GDP) with thousands of commercial mortgage-backed securities loans, its CMBS credit effect should be "minimal," according to Moody's Investors Services, New York.

Tad Philipp, director of CMBS research with Moody's, said he expects a "low level of losses directly attributable to the hurricane."

He added, "Delinquency rates may rise in the short term. But we do not expect CMBS bondholders to experience any immediate shortfalls, because we expect master servicers will continue to advance current interest while borrowers and servicers navigate the insurance claims process for lost rent and damage-repair costs."

Loans underlying CMBS should benefit from underwriting improvements resulting from 2005's Hurricane Katrina, Philipp said. "Because of that experience, the CMBS properties that Sandy touched generally have adequate windstorm coverage for wind damage and adequate business-interruption insurance to cover rental losses caused by, among other things, electrical outages making properties temporarily unusable."

He continued, "In addition, in most cases they have adequate flood insurance to cover physical damage and rent loss directly relating to flooding."

Moody's said delinquent loans and real estate--owned (REO) properties will see the most effect from Sandy, by increasing their already expected losses, while newly originated or seasoned loans supported by significant sponsor equity will suffer less. One important mitigating factor: The New York region, which accounts for a high proportion of Sandy's damage on a dollar-value basis, has experienced one of the strongest national post-crisis commercial property value recoveries.

Meanwhile, the CMBS delinquency rate should continue to see "considerable downward pressure" in coming months, reported Trepp LLC, New York. "That was certainly the case in October, as the rate saw its...

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