On Friday May 3, Moody's Investors Service said it would be reviewing 14 single asset and large loan transactions for possible downgrade because of the lack of resolution on terrorism insurance. While admitting that the risks of another attack like that on Sept. 11 "are very difficult to quantify... ignoring the risks would be inappropriate," the agency said. A drastic downgrade does not appear to be likely, however Moody's notes that there has clearly been an increase in risk for investors.

In its press release, Moody's said it will consider any current insurance and planned coverage in their analysis, as well as any government plan that might be implemented (see Fig. 1 for list of deals on review).

The fallout of the announcement by Moody's is likely to be muted, however, since talk of downgrades have been circulated for some time. "Moody's has been very good at making the market aware of what they were going to do," said Roger Lehman, director of mortgage research at Merrill Lynch. "Back in March, they published an article outlining the framework they were going to use [to analyze the affect of terrorism insurance on the sector - see Moody's "CMBS: Moody's Approach to Terrorism Insurance for U.S. Commercial Real Estate" March 1, 2002]. Regardless of whether you believe this framework is correct, this watchlisting should come as no surprise and I believe is already priced in."

Fitch Ratings followed up early in the June 3rd week, placing thirteen issues on negative watch (see Fig. 2). Their list will hold classes on watch until either adequate insurance has been acquired or until the end of third quarter, when the current insurance policies expire.

Standard & Poor's is not currently acting to put any deals on a credit downgrade watch. They are concerned about market reaction to such a move and think a move would be premature given the rapidly changing events on this issue.

What the rating agencies have to say about it may not be as disheartening as the impasse in Washington on the issue and externalities it is creating. According to a report released May 23 from the Joint Economic Committee of Congress, the lack of insurance coverage following Sept. 11 is hurting the entire economy. The report said that the lack of terrorism insurance hinders some business deals and projects from going forward. Also, the high cost of terrorism insurance can cause the misallocation of the scarce resources of companies, which is harmful to economic growth. The report added that the coverage limits on terrorism insurance availability today are very low relative to the value of the insured properties, leaving a large amount of exposure in the event of another catastrophic attack.

The committee found that only a small number of insurers are providing policies, and they are very expensive and generally insufficient. Among other things, the report noted that CMBS activity was down 26% in the first quarter compared to the same period in 2001. In addition, it said that "the impact was particularly pronounced for offices and hotels" which are off by 37% and 86%, respectively.

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