Fitch Ratings has stated that it is likely to place several US commercial mortgage-backed security (CMBS) transactions on rating watch “negative” unless Congress acts to reauthorise the Terrorism Risk Insurance Protection Re-authorization Act (TRIPRA), which is set to expire 31 December 2014.
While Fitch is not taking rating actions on CMBS transactions at this time, the agency has affirmed that actions would be “likely” if the bill is not approved by the end of January 2015.
Multiple Congress members, including house speaker John Boehner, have stated they expect the bill to be re-introduced and approved in early 2015.
If this occurs, CMBS loans will likely have limited risk as the lapse in the federal backstop for terrorism coverage will be for a short period of time in early 2015.
Fitch has said that it may act sooner than the end of January if its confidence in the likelihood of TRIPRA approval becomes more uncertain.
The expiration of TRIPRA has many wide-ranging, negative implications for CMBS.
Fitch has identified several specific areas of concern if a renewal is not approved quickly.
These include: what existing all-risk policies (with embedded terrorism coverage) cover after the expiration of the federal backstop at year-end; what policies will be provided after year-end; whether any future policies with terrorism coverage will be cost-prohibitive; the impact of the expiration in relation to properties with captive insurance programmes; and the impact of potential ratings downgrades on the insurance companies given the ratings requirements in CMBS loan and transaction documents.
Fitch has identified up to 20 single borrower and large loan transactions that are most likely to be placed on rating watch “negative”.
These transactions have exposure to large assets in major markets considered to be most at risk from a lapse in coverage and/or the likely cost increases or lack of availability of future coverage.
Most all-risk policies on large CMBS assets provide terrorism coverage which may include a 'sunset clause' or a timing limitation on claims made with regard to a terrorist event after the TRIPRA expiration.
Policies without a sunset clause are expected to provide terrorism coverage, per the all-risk policy terms, without the federal backstop after year-end until policy expiration.
Policies with a sunset clause may not provide any terrorism coverage after year-end, and borrowers may be required to seek a stand-alone terrorism policy.
