Though generally pleased with the U.S. Senate's quick approval of The Terrorism Risk Insurance Act of 2002 (S. 2600) last Tuesday, CMBS market players are in wait-and-see mode as the bill still has to go through negotiations between the Senate and the House of Representatives.

"In light of the positive news, we hasten to add passage of the Senate bill should not be considered evidence that the political parties are ideologically closer to a compromise," said Roger Lehman, a director at Merrill Lynch, "but rather passage should be viewed as a means of expediting movement toward conferencing."

Conferencing, which usually takes 20 days, is the process used to work out the specific differences between the House bill (H.R.3260 passed last November) and the Senate bill.

Rating agency reaction

Meanwhile, the rating agencies are also keeping a keen eye on these events, evaluating how they would affect CMBS deals that have been put on watch for possible downgrade.

"We are still talking to borrowers about their individual insurance plans while keeping an eye on what is happening in Washington," said Tad Philipp, managing director at Moody's Investors Service. "We are encouraged by the progress, but it is premature to take the transactions off of watch for downgrade because there are still some significant hurdles yet to go."

Moody's put fourteen single asset and large loan transactions on review for possible downgrade on May 29 (see ASR 6/10/2002, p.19).

Fitch Ratings, which followed Moody's lead by placing thirteen issues on negative watch, is also closely monitoring events in Washington.

"I think it's a step in the right direction," said Eileen McDonald, an associate director at Fitch, referring to the Senate's passage of the terrorism bill. "We are just going to have to see what happens after it goes through to the White House to see how the insurance industry receives the bill - if they would actually make more policies available for the borrowers. Basically, it is a waiting game."

Meanwhile, Fitch has removed from Rating Watch Negative three classes of 1345 Avenue of the Americas Trust, citing the deal's two separate blanket insurance policies that provide sufficient coverage for terrorism. The rating agency also put additional classes of Chase CMSC 2001-245 Park Avenue on Rating Watch while affirming the deal's class A-1.

The action of putting these classes on Rating Watch Negative was related to GMAC's making a servicer advance for a force-placed insurance policy premium while at the same time holding in escrow the amount from the borrower. Fitch said that if the funds used in escrow are not used to repay the servicer advance, then this would be considered an expense of the trust, which, in turn, would result in an interest shortfall in all classes on the deal except the A-1 class.

Politically-motivated?

There has been talk that Fitch's and Moody's moves to put transactions on negative watch were, at least in part, politically-motivated. Sources said that there has been tremendous pressure placed on the rating agencies to downgrade transactions to compel Congress to take action. They added that if the rating agencies downgrade transactions, this would lead to instability and volatility in the capital markets sending a message to the Congress that its intervention is imperative.

However, other market sources said that it was never a ploy. The rating agencies really intended to downgrade deals if there was no positive feedback from Washington.

Moody's Philipp said that putting the specified deals on review was done solely for credit reasons. "Since Sept. 11 there has been an increase in event risk and a decrease in bondholder protection due to inadequate insurance, which is what lead to our rating actions."

Standard & Poor's, on the other hand, chose not to place any existing CMBS transactions on CreditWatch or take any downgrade action due the lack of sufficient terrorism insurance coverage.

"We don't intend to change our position right now," said Kim Diamond, managing director at S&P. "Every time there's an update on the situation we keep abreast of it to make a decision as to whether or not we should be taking a different position."

Diamond said that there is no empirical data currently available that could help them predict when, where and in what form and magnitude a terrorist attack might happen.

"If you think about the size of America and the number of properties that are located here, there is still a very low probability of any individual property being the target of a terrorist attack," she said. She noted that their competitors' approach seems somewhat arbitrary - one reason why S&P has not chosen to take a similar route.

"By definition, if terrorism is going to be effective, it is unpredictable. I do not know how they (Fitch and Moody's) are deciding which properties are potentially at risk and how they would adjust the ratings to take into consideration the risk that they perceive to be there," she said.

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