Katrina: How Big a Blow to Credit?


After the devastation wrought by Hurricane Katrina on Aug. 29, what can investors expect? Standard & Poor's Ratings Services is closely monitoring the effects of the megastorm on the economy and on credit ratings for industrial, energy and utility, financial services, insurance, and public-finance issuers.

A word of caution: In most cases, it's still too early to estimate the storm's overall effects on credit quality. Nonetheless, our analysts have assessed the credit outlook for various public and corporate entities based on available information (for S&P's analysis of the storm's impact on equity investing, see BW Online, 8/30/05, "Counting Katrina's Costs").

Here's a look at how Katrina is likely to affect several segments:

The U.S. Economy: The storm will likely hurt third-quarter U.S. GDP, shaving a few points off our forecast of 3.7% growth. Trade, tourism, agriculture, and construction (Florida's largest industries), as well as Louisiana's energy-related industries, will be hurt in the third quarter. At the same time, repairs to hurricane-related damage in Florida, Mississippi, Louisiana, and other regions hurt by the storm should boost GDP in subsequent quarters (for more, see "Katrina Rips Into the Economy").

State and Local Economies: The exact effects of the hurricane on local economies -- and consequently on government revenues and short-term cash flows -- are unknown at this time, but tourism and gaming-related revenues are expected to be lost. In addition, any loss of oil and gas revenues resulting from damage to offshore rigs may strain the state of Louisiana. We have placed our ratings on several regional issuers on CreditWatch with negative implications, including Louisiana (currently rated A+), Mississippi (AA), New Orleans (BBB+), and Biloxi, Miss. (A).

Insurers: Because of the size and path of the hurricane, S&P believes its impact on insurers will likely be different than what they experienced in the wake of Florida's four hurricanes last year. For example, the difference between claims paid from one large hurricane, as opposed to those resulting from a string of smaller ones, might turn out to be sizable for reinsurers.

Another difference: Commercial claims could be significant because, unlike Florida, Louisiana is home to a number of facilities in the oil, gas, and chemical sector. Katrina will also result in serious damage to the casino businesses along Mississippi's Gulf Coast. Finally, we suspect that claims from flood damage might be a contentious issue for personal policyholders, as insurers and the insured wrangle over the causes of property damage.

Despite Katrina's strength, it was still apparently less destructive than many had feared. Although the damage is severe, estimates of losses attributable to the hurricane fell as the storm ran its course. Projections in the morning of Aug. 29 had run as high as $25 billion. However, by the evening, research outfit EQUECAT, for example, was projecting damages of $9 billion to $16 billion.

Writers of homeowner and commercial package policies, farm owners' coverage, auto damage insurance, and inland marine policies -- a catch-all category that includes riders for expensive items like jewelry as well as boats -- are likely to see the most impact from Katrina. State Farm and Allstate (ALL), both rated A+, together made up 45% of the market for these categories of coverage in Louisiana in 2004, according to data filed with state regulators.

Rounding out the top five companies are Progressive (PGR), rated A+; St. Paul Travelers (STA), rated BBB+; and American International Group (AIG), rated AA. Other companies that could be disproportionately affected would be those that specialize in writing coverage for the petrochemical industry.

Although damages are still being tallied, S&P thinks it unlikely that many ratings will change among the largest affected insurers. Ultimately, no ratings changes were made as a direct result of such major events as the terrorist attacks of September 11, 2001, and the 2004 quartet of Florida hurricanes.

Utilities: Although Katrina is obviously unfavorable for utility companies in the area hit, the storm won't affect credit ratings at this time. Hardest hit were portions of BBB-rated Entergy's (ETR) service territory (including New Orleans) and Southern Co. (SO) affiliate Mississippi Power Co., rated A, both of which have suffered extensive outages and damage to transmission and distribution systems.

The ultimate effect on Entergy's ratings will be determined by the damage caused in the service territory, as well as on restoration costs, the company's ability to restore power to customers, and the responsiveness of state authorities. As of June 30, 2005, Entergy had $615 million in cash and about $1.3 billion available on a $2 billion credit facility expiring in May, 2010.

Mississippi Power has a storm-repair reserve of only $3.5 million, but it also has liquidity lines of more than $100 million. The company has positive regulatory relations as well, which would improve recovery prospects for any storm-repair costs that exceed reserve balances.

Oil and Gas: Crude oil prices are likely to continue rising, depending on well shutdowns in the region. Indeed, crude for October delivery shot to a record high of $70.80 per barrel on Aug. 30 before pulling back to close at $69.81. Gasoline prices are also expected to increase, depending on refinery shutdowns.

Natural gas supplies are also a worry. The New York Mercantile Exchange extended the delivery period for its August natural gas contract by a day after the storm shut down the Henry Hub facility operated by Sabine Pipeline in Louisiana. Deliveries had initially been halted for an undetermined period after the exchange declared a force majeure event on Aug. 29 -- indicating concern that supply disruptions would continue through Thursday, Sept. 1.

Travel/Transportation: The cancellation of flights into and out of Gulf Coast airports is unlikely to have a major financial effect, even on air carriers with significant exposure in the region. The storm will likely have the most effect on Atlanta-based Delta Air Lines (DAL), rated CC, and AirTran Holdings (AAI), rated B-, with much of the storm-related costs suffered in the redeployment of planes. With passengers unable to simply switch to other carriers, Delta is not likely to lose much revenue, given that flights have been booked and paid for, and most will merely be delayed.

There have been reports that some carriers, including Delta and UAL Corp.'s United Air Lines (D), would waive some fees for customers who were to fly to the storm area but needed to change their travel plans. To the extent that the storm causes an increase in oil prices for a while, airlines will suffer also from higher fuel expenses.

Building Materials: The storm won't affect credit ratings on building materials companies that S&P follows, given the lack of significant exposure to the area. Also, any positive effect on demand for materials from the rebuilding effort won't be seen immediately.

From Standard & Poor's Ratings Services


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