Following the attacks on the World Trade Center, market analysts are united in their best effort to not overshadow the tragedy of the losses suffered. While many have been reticent as to what the ripple effects may be, reports emerging last week highlight that the European commercial mortgage-backed sector might be poised to feel the heat of a shaky economic backdrop.
European commercial mortgage-backed analysts are preparing for what may be a blow to commercial property leasing. The assumption is concluded after investigating the possible effects the WTC attacks may have on investor confidence on what was already a wavering sector.
According to Dresdner Kleinwort Wasserstein, within the corporate sector the appetite for commercial property will likely be further reduced. In its ABS monthly research report, Dresdner emphasizes that single-tenant occupant leases in Europe, similar to the WTC, will suffer further scrutinizing on behalf of investors who were already presumed to be edging away from credit risks.
It is still premature to conclude exactly how the repercussions will unfold but the market has already seen some of the promised September issuance subsiding with a number of issuers opting to wait on the sidelines. Some market analysts said many might not get enough wind to sail back into the market this year.
Historical figures spotlight the sector vulnerability. Dresdner's report draws a parallel between the financial crisis that spanned 1997 and 1998 - the first withstood by the European ABS market. If the figures prove as a harbinger for what to expect today, should the WTC disaster indeed thrust the American economy into a full-blown recession, then the ABS market can expect spreads to widen by as much as 10 to 35 basis points for triple-A tranches. "There are some arbitrage ABS deals back in the market and spreads at the triple-A level are already widening," said Dresdner's analysts.
Nonetheless, the comparison is marred because the market has never experienced a similar situation. Spreads on triple-A-rated RMBS issues are likely to remain a safe haven, said Dresdner. "Although consumer credit quality (unemployment) and property markets need to be watched, a large number of existing issues in both the RMBS and subprime sector should be able to withstand near-term slowdown of the European economy due to their structure and historical pool performance," reported Dresdner.
Canary Wharf
For buildings like London-based Canary Wharf a new realm of event risk has bloomed, said the analyst at Dresdner. "[The attacks] are something that was quite unthinkable," added the analyst. "I don't think that any analyst reviewing insurance coverage on a property [even if it did carry terrorist coverage] could ever imagine a scenario like this. Now we have this new dimension of risk."
Still, the bank emphasizes that this present scenario is a progression of earlier market readings. To be sure, Citigroup's announcement in July that it would not immediately be occupying all of its space in Canary Wharf (see ASR 9/3) sparked speculation that the move was a certain indicator of the hard times ahead for the U.K. office sector. The Thursday following the WTC attacks, Canary Wharf announced it would halt construction on one of its buildings.
This, of course, comes with alleviation for analysts who view the move as a step in the right direction in addressing the dwindling market demand. "It is Canary admitting to a slowdown in the letting environment but it also limits the amount of supply in the market," said Robert Patterson with Morgan Stanley's Securitized Products Group.
As to whether Canary Wharf's decision to stop construction is directly related to the WTC is uncertain but like most players in the corporate segment, the sentiment is one that leans to a "wait and see" strategy. The Canary Wharf decision affects one of its "speculative" buildings under construction of which it had already lined up one tenant for a sizeable portion of the office space, explained Patterson.
Instead, the group has decided not to start building until market conditions become more evident, he adds.
However, what is certain to emerge from the U.S. experience is a re-evaluation of insurance coverage. While earlier reports from rating agencies suggest that insurers will be willing to pay up on premiums, some market participants are skeptical as to when those claims might actually be settled.
"To what extent does the insurance coverage provide protection against such acts?" asked the analyst at Dresdner. "Coverage has extended itself to acts of terrorism, especially in buildings that have been targets before."
Both the WTC and Canary Wharf are candidates under such stipulation. However, while the Canary Wharf is also insured by a pool of some of the larger insurance groups under Pool Re, if a situation of similar magnitude were to arise in the U.K. and these insurance companies were unable to meet premiums, the government would step in.
Pool Re, created in 1993 as a result of the IRA bombings in Canary Wharf, is backed by the government and covers businesses that need to insure against terrorist attacks. However, the U.S. attacks stress that wording is key when investors review such single-tenant deals. If insurers are looking for a portal, suggesting that the WTC attack resulted from an act of war and not an act of terror could actually prove grounds for not paying. Though the British government acts as a last-resort guarantor for policies covering terrorist attacks, it is uncertain if the government would cover war risks.
On Tuesday September 11, 2001, following the attacks on the U.S. targets it was decided that London City Airport should close, particularly because of its close proximity to the Canary Wharf, said one analyst. "The city airport was closed," she added. "Canary Wharf is being built as a business district, a tiny Manhattan - I don't think anyone will ever look at these buildings and not consider what's happened."
