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Fitch: U.S. CMBS Transactions, Impact of Terrorist Attacks

NEW YORK--(BUSINESS WIRE)--Sept. 27, 2001--The tragic events of September 11 will not cause a dramatic spike in defaults of Fitch- rated CMBS bonds, although the rating agency does anticipate rising loan delinquencies, with hospitality properties becoming the hardest hit.

CMBS investors will be protected from bond defaults because the collateral supporting most CMBS multiborrower transactions are characterized by significant diversity in property type and geographic location. Although many single borrower transactions do not enjoy the same benefits of property diversity, they may have geographic diversity and typically are lower leverage than loans in multiborrower transactions.

Fitch anticipates loan delinquencies will rise. The events of September 11 will hasten the economic downturn Fitch has expected. Properties already experiencing problems, especially hotels and retail, will make up a majority of delinquent loans. Properties such as office, with evenly distributed credit-worthy tenants and evenly distributed lease rollover for the next few years, will continue to perform well. Even as demand for office space decreases in many parts of the U.S., office properties are at historically high occupancy levels. Delinquencies will rise for those properties with concentrated rolls. Also, Fitch will be monitoring markets where layoffs, such as those in the airline industry, could affect local economies.

The hospitality industry will be one of the hardest hit sectors. This is not limited to New York City or Washington, D.C. but will be felt nationwide. The industry was already experiencing declining revenue per available room (RevPAR) for the past five months, and both business and leisure travel will continue to drop due to recession worries and safety concerns. Fitch has always been bearish on the lodging industry due to the high operating leverage. Therefore, Fitch has rated very few single borrower hotel securitizations.

Fitch anticipates actual net cash flows to decline somewhat due to higher vacancies, rising insurance premiums and higher security costs, but most properties will be able to absorb this stress. Fitch underwrites a cash flow utilizing sustainable rents, vacancy factors, capital improvements, and tenant leasing costs. As a result Fitch does not underwrite properties at the peak performance that they experienced in recent years. The average debt service coverage utilizing the Fitch net cash flow and the actual mortgage payment was approximately 1.35x for multiborrower deals rated by Fitch during the past year.

A majority of the CMBS deals Fitch rates consist of long term fixed rate mortgages. Fitch expects fewer delinquencies in these mortgages vis-a-vis short term floating rate mortgages due to reduced refinance risks. Also, transitional properties in floating rate deals may experience more difficulty short term in achieving their repositioning goals.

Many factors will determine the total impact of September 11. Military intervention looms as a potential outcome. The extent and duration of this action will certainly have a significant impact on the economy. Another unknown factor is how quickly people recover from the terrorist attacks and are able to return to their usual routines. Fitch will continue to monitor these events closely, with a particular interest in their impact on CMBS deals, and report changes as necessary.

Fitch, New York
Zanda Lynn

Mary Metz
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