CMBS exposure to Hurricane Florence broad, but impact likely limited

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Estimates of commercial mortgage bond exposure to Hurricane Florence vary widely, but rating agencies generally view the impact on performance to be fairly limited.

Moody’s Investors Service estimates that a little over half of the commercial mortgage backed securities it rates have some exposure to North and South Carolina, where the Florence struck last week with windspeeds that were relatively modest, Category 1on the Saffir-Simpson scale, but brought excessive rainfall and storm surge.

Of the 637 transactions Moody's rates, 345 hold loans backed by properties in areas potentially affected. Those 345 deals hold a combined 1,479 properties in North Carolina (69.9% of the affected universe by balance) and South Carolina (30.1%), with an aggregate loan balance of $10.7 billion, or 2.7% of the total collateral, by balance..

Moody’s rates 39 commercial mortgage bonds with exposures of 10% or larger, including 38 conduit/fusion deals (of which 15 were issued after 2009) and one single-asset, single borrower deal.

The exposure includes 160 properties securitized by Freddie Mac in 18 different K-series transactions; mortgage bonds located in North and South Carolina, representing 3.6% of collateral in Freddie Mac deals that Moody’s rates, of which the largest deal exposure by share representing 6.9% of its respective transaction.

Morningstar Credit Ratings has identified some $1.49 billion in securitized commercial mortgages potentially at "elevated risk" because of major damage in the wake of Hurricane Florence.

It found 189 properties backing 187 securitized loans in 16 of the 18 North Carolina counties that the Federal Emergency Management Agency declared disaster areas eligible for individual assistance. This includes properties with a combined balance of $1.05 billion in Cumberland and New Hanover Counties, home to the state’s sixth- and eighth-largest cities, Fayetteville and Wilmington, respectively.

Properties in counties that are not part of the disaster declaration have also seen significant damage, Morningstar says.

Freddie Mac-issued deals account for 32.8% of the total exposure by balance. The three deals with the largest property-level exposure are FREMF 2018-KL2P with $118 million across five properties, FREMF 2014-KX01 with $40.9 million between two properties, and CSAIL 2015-C4 with $38 million in combined balance in two loans.

Morningstar called the 10 largest properties backing CMBS loans in the FEMA-designated disaster zones, which account for 12.2% of the balance in an effort to quantify the damage. As of Sept. 20, it was able to reach representatives of only two, Addison Ridge Apartments and Addison Ridge Phase II, each of which secures a $25 million loan. These are the first two phases of a three-phase apartment property that primarily serves nearby Fort Bragg.

Neither of the three rating agencies expects to see waves of defaults resulting from the storm, if only because business-interruption insurance should cover the gap in service, if necessary, for most properties.

Mortgage bond investors could be further insulated from interruptions in loan payments because servicers are expected to advance payment of interest and principal to bondholders

“Although CMBS loan delinquency rates may rise if there were to be significant property level damage and temporary closures, we expect master servicers would continue to advance current interest while borrowers and servicers navigate the insurance claims process for lost rent and damage-repair costs,” Moody’s said in a report published Sept. 13.

The report noted that “only a minimal number” of CMBS loans from the 2017 hurricane-affected areas, Hurricanes Harvey, Irma and Maria, fell delinquent.

Morningstar observed in its report that flood damage could prevent refinancing some existing loans and jeopardize the payoff of roughly $51.5 million in securitized loans that mature over the next 12 months. “Ultimately, if a property is operating, meeting its debt obligations, and there’s no lasting hurricane-related fallout, financing should proceed, and the loan should pay off,” the report stated.

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