During the past few weeks, Hurricanes Helene and Milton had a major impact on Florida, Georgia, North Carolina, South Carolina, Tennessee, and Virginia, where high winds, rainfall, and storm surges caused extensive flooding. The severe weather effects have caused widespread property damage; however, it is difficult at this early stage to gauge the overall impact on residential homes and properties. Moreover, it will take several months to understand the scope of the disruption to individuals, who might have been displaced or lost their jobs (for example, due to damage to their place of work). Early insured loss estimates of Hurricane Helene are in the mid-single to low-double-digit billions of dollars (see "U.S. Insurers' Earnings Could Take A Hit From Hurricane Helene," published Oct. 3, 2024.). Meanwhile, damage from Hurricane Milton could match that of Hurricane Ian, which struck in 2022 and resulted in about $60 billion of insured losses (see "Hurricane Milton: The Implications For Rated U.S. Insurers And Global Reinsurers," published Oct. 9, 2024).

S&P Global Ratings describes the exposures to the hurricanes and the initial ratings impact (if any) for the following structured finance asset classes:

• Commercial mortgage-backed securities (CMBS) transactions;
• Residential mortgage-backed securities (RMBS);
• Auto asset-backed securities (ABS);
• Triple-net lease;
• Timeshare;
• Small business; and
• Unsecured ABS.

CMBS

The commercial mortgage-backed securities (CMBS) transactions we rate include 446 loans totaling over $13.9 billion on properties located within Florida, Georgia, North Carolina, and South Carolina. However, many of these are portfolio loans that are secured by multiple properties located across multiple states. Therefore, we narrowed the property counts and allocated loan exposures to 202 properties totaling $2.3 billion. The Tampa, Fla. metropolitan area has the largest exposure at $1.6 billion across 142 properties. The largest exposure within Tampa is the Bowery Bayside Stepstone, which has an allocated loan balance of $99.6 million, secured by a 608-unit multifamily property built in 1986.

We expect many borrowers will have business interruption insurance that will serve as a temporary gap, allowing them to continue making debt service payments in the near term. Longer term, insurance proceeds should help with the rebuilding efforts if the property sustained damages. Still, some borrowers may be underinsured or may lack flood insurance for properties located in areas that are not flood prone. While no ratings impact is expected in the near term, we will continue to monitor the developments and performance of the loans secured by properties in the affected areas.

For more information, see "U.S. CMBS Update Q3 2024: Issuance Remains Robust Despite Accelerated Office," published Oct. 10, 2024.

RMBS

Natural disasters such as Hurricanes Helene and Milton can affect RMBS noteholders in several ways. Two of the most notable potential impacts are: (1) liquidity disruptions as borrowers are unable to meet their monthly mortgage payments; and (2) decreases in recovery values of defaulted properties. During recent natural disasters, servicers have offered temporary forbearance or deferrals to borrowers having trouble making payments because of such events. As a mitigant, servicers of U.S. RMBS transactions typically advance principal and interest on delinquent loans through liquidation (or for a prescribed number of months for more recent nonqualified mortgage transactions). Additional mitigants that may offset temporary liquidity stresses in some transactions include the availability of excess interest and the deferral of bond interest payments with compensating interest payable thereon. These mitigating features and our observations of similar prior events suggest that temporary payment disruptions should not have a material impact on our outstanding ratings.

If affected borrowers ultimately default despite temporary assistance (such as forbearance), recoveries on such loans may be limited due to incurred property damage. As a result, transactions with material exposure to Hurricanes Helene and Milton may sustain losses. If there is appropriate insurance coverage, losses should be mitigated. Moreover, to the extent that credit enhancement in a transaction has built up over time, the impact of such losses on certain tranches may be muted. However, we could revise our ratings based on changes in delinquency status in the short term, and on recoveries in the medium to long term, based on specific transaction attributes and features.

To assess the potential exposure of rated RMBS to the effects of the hurricanes, we have carried out a preliminary study that focuses on "affected areas", defined here as the 126 counties in Florida, Georgia, North Carolina, and South Carolina, which qualify for the Federal Emergency Management Agency's (FEMA's) Individual Assistance Program.

We determined hurricane exposure for each transaction as the ratio of the current loan balance for properties in affected areas relative to the transaction's overall balance. We recognize that not all properties in affected areas were necessarily damaged by the storm and, as such, we believe that our analysis is conservative.

Of the roughly 1,500 rated transactions we analyzed, for which the rating on the highest rated tranche is greater than 'CCC', the total amount within the affected areas is approximately $92 billion, or 7.7% per transaction on average. By count, excluding those with a highest active rating of 'CCC' or below, 188 legacy (1.0) transactions (i.e., rated prior to the 2008 financial crisis) have an exposure greater than 10% and 107 new era (2.0) transactions (i.e., rated after the 2008 financial crisis) have exposure greater than 10%. Chart 1 orders rated transactions in ascending order of disaster area exposure, broken out by RMBS 2.0 (those issued after the 2008 financial crisis) and 1.0.

Chart 1

We don't expect there to be a significant impact on the performance of our rated transactions. Any rating movements are likely to be minimal for most tranches. The majority of RMBS rated by S&P Global Ratings have low exposure (if any) to Hurricanes Helene and Milton and may benefit from the structural mitigants described above to further support ratings. However, the limited number of transactions that have more than 10% of collateral in regions affected by the hurricane present a concentration risk and are a potential concern for disruptions in cash flows and even for eventual realized losses. We will continue to monitor the areas affected by the storm and provide updates as necessary on our RMBS ratings.

Auto ABS

We currently believe that Hurricanes Helene and Milton are unlikely to lead to auto ABS rating downgrades, based on our assessment of transactions with meaningful concentrations in Florida. We did, however, identify 25 at-risk auto loan securitizations, defined as having approximately 30% or more of the closing collateral pool balance associated with obligors in Florida (see tables 1 and 2 below). Among these, 19 of the transactions are collateralized by prime credit quality assets, while the remaining six are backed by subprime collateral. Seasoned prime and subprime transactions have robust structures and credit enhancement buildups, which shield them from extensive losses.

Table 1

Table 2

Servicers will likely grant payment deferrals to those who have been affected by the hurricanes and live in FEMA-affected areas, per the companies' natural disaster collection policies. As such, there is likely to be a temporary increase in delinquencies and extensions from October to December for those transactions with a significant concentration in the FEMA-declared areas of Florida. Because the transactions have reserve accounts, and all collections, including principal, are available to pay bond interest, liquidity risk is largely mitigated. Further, one to several months of cushion are added when testing for legal final maturity dates.

At the time of origination, many sponsors of auto loan ABS (including those for the transactions listed in the table) require that the obligors of the financed vehicles have comprehensive vehicle insurance, which typically covers flood damage. There is a risk that some borrowers--especially those with poor credit quality--could cancel or fail to renew their insurance policies after closing. To address this risk, some lenders force-place insurance on the underlying vehicles (usually at the expense of the borrower). We expect prime obligors with strong credit profiles to maintain a high degree of insurance coverage, further mitigating potential losses in the 19 at-risk prime auto ABS transactions. Further, some borrowers (particularly in the subprime space) have guaranteed asset protection insurance, which pays the lender the difference between the financed amount and the insurance proceeds.

Other hurricane-affected states don't have concentrations in our auto loan pools that exceed 30%, and most of our pools have diversification. However, to the extent we see very high levels of concentrations, as shown in the credit union transactions (SCCU and GTE), we usually apply higher-than-normal multiples to our base case to account for the volatility in performance that could result from their high exposure to one geographic location.

Triple-Net Lease

Triple-net lease transactions are secured by real estate properties and the related lease cash flow. Individual S&P Global Ratings-rated transaction exposures to properties in Florida are 0.6% to 14.1%, while exposure in other states impacted by Hurricane Helene is at most 1.7%.

In the case of triple-net master trusts, the tenants are required to maintain comprehensive liability insurance, "all-risk" fire, casualty, and hazard insurance, and, in some cases, business interruption insurance, which would cover any damages and lost revenue at each property. In addition, the trusts also feature advancing from the property manager, the servicer, or the indenture trustee for amounts that are deemed recoverable. For these reasons, we expect no direct rating impact for the sector.

Table 3

There's exposure to Hurricane Helene in triple-net master trusts. The table below shows the percent of properties by appraised value in the affected areas. However, these properties have property specific and business interruption insurance that would cover any damages and lost revenue.

Table 4

Small Business

S&P Global Ratings-rated SBA 7(a) transactions are backed by a pool of unguaranteed interests in SBA 7(a) loans. These loans are secured by business cash flows, personal guarantees, and equipment/commercial property. Individual transaction exposure to businesses in hurricane-impacted areas ranges from as low as 2.4% to over 20%. Florida is the largest exposure, in most cases accounting for 5% to over 10% in many deals.

Per SBA standard operation procedures (SOPs), the borrowers are required to maintain hazard insurance on all assets pledged as collateral and a separate policy if the business is in a state that requires additional coverages for events such as wind, hail, and earthquake. Flood insurance is mandatory as set forth by the provisions of the National Flood Insurance Program. Most servicers of S&P Global Ratings-rated transactions are in the process of contacting borrowers to assess hurricane impact. There may be some ripple effect on borrowers in unaffected parts of the Southeastern states if they conduct business with businesses in the impacted areas.

We are monitoring the impact on affected deals, especially those on the higher end of the exposure scale, to determine whether ratings actions might be required.

Timeshare

Timeshare securitization performance can be impacted by natural disasters due to direct effects from damage to resorts and sales centers, as well as by the impact on borrowers who live in affected areas when their ability to make payments is compromised.

Damages to resort properties could lead to a decline in owner satisfaction, which can impact performance of these deals. We reached out to the timeshare developers that issue securitizations rated by S&P Global Ratings, all of which operate multiple properties in Florida and, to a lesser extent, the other impacted states. It is our understanding that damage to their resorts has been limited and operations are mostly back to normal. Even if more damage had been sustained, most developers operate a points-based system that allows timeshare owners the ability to stay at any resort in the developer's network, depending on availability and points. This means owners are not tied to one specific resort, which may be offline due to hurricane damage (or any other reason) and should help maintain obligor satisfaction.

While the costs of repairs should be covered by insurance, increases in the cost of insurance due to the storms may lead to higher maintenance fees, which could increase delinquencies and defaults. In the case of timeshare interests that are part of a points-based club, this risk will be mitigated because increases in maintenance fees will be spread across the owners in the club.

In addition to causing property damage and potentially affecting borrowers' ability to pay, storm damage may also slow new timeshare sales if centers remain closed. However, it is our understanding that while some impacted properties had sales centers, most are now open and there is minimal impact on sales expected. Sales are one indicator of the strength of a developer's business. In addition, a slowdown in sales may limit the collateral available for substitution of defaulted loans, a feature in timeshare securitization. Our analysis does not give credit to the substitution of a defaulted loan with a performing loan.

Issuers are focused on evaluating their exposure to borrowers in heavily impacted areas and the need for any additional loan servicing. To assist these obligors, some developers may offer force majeure deferrals of three to six months, which are supported by dedicated reserve funds in the transactions. While it is too early to assess the ultimate impact of these storms on performance of the S&P Global Ratings-rated timeshare securitizations, we expect ratings to remain stable due to the robust transaction structures, which include excess spread, reserve accounts, and performance triggers. We will continue to assess the situation and monitor the impact on S&P Global Ratings-rated timeshare securitizations.

Unsecured ABS

Most unsecured ABS transaction asset pools (student loans, personal loans, and credit cards) are geographically well diversified. Within the student loan sector, state authority lenders typically have loan concentrations in student and parent (co-signer) obligors with a state nexus for students that resided in the state prior to attending school, or that reside in the state while attending school. These concentrations diminish over time as graduating students (and parents) subsequently relocate. However, obligors with a present- or past-state nexus to a hurricane-impacted state may be offered or able to request temporary forbearance of loan payments.

We have reached out to the state authority lenders to determine the impact of their exposures to such areas and to understand the extent of any forbearance they intend to offer, and what their expectations are regarding increased delinquencies. Once we understand this exposure, we will assess the effect upon the cash flows in their transactions, most of which are master trust, serial bond structures, which are typically well enhanced and subject to some capital structure adjustments by way of annual issuance.

Personal loan and credit card ABS transaction pools are typically well-diversified geographically without high concentrations in a single state, but both will likely include loans to borrowers residing in impacted states. We expect to see some increase in delinquencies and will continue to monitor transactions for any ratings impact.

Full Extent Of Hurricane Damages And Losses (And Ratings Impact) To Unfold

The extent of the damage and losses will unfold over the coming months. In the meantime, we will closely monitor exposed pools and determine whether there will be any impact to ratings in any of the affected structured finance sectors we rate.