S&P Studies Impact of Hurricanes Katrina, Rita on Several Sectors

The one-two punch of hurricanes Katrina and Rita have resulted in unprecedented destruction, expense and displacement for New Orleans and Gulf Coast portions of Louisiana, Mississippi Alabama and Texas.

In an effort to evaluate the effects of this disaster on both private and public sector credits, Standard & Poor’s has published a Credit FAQ, “Fallout To Date From 2005’s Hurricanes,” which details the effects of the two big storms on the general economy, as well as on credits in the insurance, public finance, corporate and structured finance sectors.

For the economy as a whole, Standard & Poor’s Chief Economist David Wyss said that storm damage may result in a loss of 0.75% of GDP in the second half of the year. He adds that longer term, there are three major concerns about the storms’ economic effects; the impact on energy prices; the speed with which shipping can again use the Port of New Orleans; and the overall costs of rebuilding the damaged region. The last, he noted, will likely serve to boost the federal budget deficit next year with an estimated $150 billion in federal outlays. Damage to energy facilities will likely keep gasoline and natural gases high in the short term and possibly longer. Homeowners who use natural gas for heating this winter could be especially hard hit. “As far as we can see now,” said Wyss, ” a really cold winter might mean indoor cold as well.”

In the wake of Katrina and Rita, the insurance and public finance sectors have the potential for the most damage. “For most of the affected insurers we cover, the hurricanes are an earnings event, which means that some significant portion of this year’s earnings will probably be lost to it,” said Thomas Upton, managing director in Standard & Poor’s insurance practice. For 13 of them, however, it will prove to be a capital event, meaning that they will have to tap the capital markets to maintain capital adequacy at acceptable levels.

As for public credits in the region, dozens of localities, parishes, counties and special taxing districts – as well of the state of Mississippi and Louisiana- – have been put on Credit Watch with negative implications. That’s is largely because it has been difficult to get information about many of them in the difficult conditions after the storm, and because the tax bases in many places, which depend on sales, hotel, and gaming taxes, have been virtually wiped out.

As of yet, however, every affected credit has principal and interest payments since the storms. And Standard & Poor’s expects that bond insurers will have no problems in meeting their obligations.

Corporate credits and CMBS were less affected. Among corporates, three casino operators were placed on Credit Watch as was on utility, Entergy Corp., whose New Orleans subsidiary has filed for bankruptcy in the face of the massive rebuilding costs it faces. CMBS escaped relatively unscathed, as only one credit, representing the backing of 21 multi-family projects has been placed on Credit Watch. However, 30% of the rated credits affected by the storm have yet to report the extent of damage to their properties.

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by sending an e-mail to research_request@standardandpoors.com.