Sandy Probably Impaired Isolated CMBS Deals, Credit Suisse Says

The impact of Hurricane Sandy on U.S. commercial-mortgage bonds will probably be confined to individual deals, while it’s still unclear which properties are affected, according to Credit Suisse Group AG.

As much as $14 billion in debt on buildings in lower Manhattan, one of the areas hardest hit by the biggest Atlantic storm in history, is contained in commercial-mortgage backed securities, Credit Suisse analysts wrote in a report yesterday. The damages will “likely be far less,” the analysts said.

“Many of these loan-specific issues will take time to unfold and property level damage, in some places, cannot be fully assessed as of yet,” said the New York-based analysts led by Roger Lehman. “There will be few, market-wide implications of the storm.”

Commercial-mortgage bond investors are weighing the impact of Hurricane Sandy on U.S. real estate with as many as 3,761 loans totaling $91.5 billion in debt located in disaster zones, according to Amherst Securities Group LP. Insurance should cover damage sustained during the storm, according to Darrell Wheeler, a New York-based debt strategist at Amherst.

“The issue we are tracking is how many loans are insufficiently insured for this event,” Wheeler said in an e-mail. “We won’t know that for several months as servicers contact their borrowers.”

Private Insurance

Properties that are secured by large loans are more likely to have purchased private insurance in excess of the guidelines laid out in commercial-mortgage bond deal documents, according to the Credit Suisse analysts.

Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, was flooded and several buildings sustained extensive mechanical damage, the Credit Suisse analysts said, citing reports published by the property managers. A $3 billion mortgage on the complex was sliced up and packaged into five different bond deals during the peak of the property boom in 2007, according to data compiled by Bloomberg.

“The insurance required by the loan document appears reasonably extensive and we believe it would likely go a long way covering a significant portion, if not all of the incurred damage,” according to Credit Suisse.

Loan Defaults

Most commercial properties have insurance that covers windstorm, flood and business interruption, Fitch Ratings said in a Nov. 2 report. Many loan defaults due to the storm will be temporary as power and connectivity issues are resolved, according to the New York-based rating company. Resolutions may take longer if borrowers with property damage experience delays in receiving insurance proceeds, making repairs and resuming operations, according to Fitch.

The extra yield investors demand to own top-ranked commercial-mortgage bonds rather than Treasuries rose to 107 basis points, or 1.07 percentage points, on Nov. 5 from 104 basis points on Nov. 1, according to a Barclays Plc index. The spread was at 101 basis points on Oct. 24, the lowest in at least four years.

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