NEW YORK, Sept 2 (IFR) - Bond investors worried about
exposure to the struggling US mall and retail sector are buying
protection in a niche part of the derivatives market.
Spreads on junk-rated portions of the commercial mortgage
bond market's CMBX derivative product have blown out and volumes
have shot up in the past few weeks, reflecting concerns that
some riskier mortgage bonds could suffer bigger losses than
Spreads on lower-rated BB tranches of the CMBX Series 6 -
which has a heavy 36% exposure to retail - widened by at least
165bp in August to a high of 879.88bp, according to data
Volumes have also soared, with US$85m gross notional of
contracts on CMBX 6 BBs bought in the week ended August 26
compared to US$16.4m in the prior week, according to data from
the Depository Trust & Clearing Corporation.
"People are trying to buy protection and trying to short
CMBX, because they potentially may take losses on malls in less
desirable locations," said Jason Callan, head of structured
products at Columbia Threadneedle Investments.
"Triple B minus and BB bonds have taken the brunt of it."
Worries about the retail sector, which have been building
for months, have ratcheted up in recent weeks following a slew
of negative news.
CBL & Associates Properties, a mall operator that has
borrowed extensively in the CMBS market, announced the
discounted sale of two weaker malls in its portfolio in July,
while Macy's said last month it plans to close another 100
stores to shore up declining profits.
CBL's Fashion Square Mall in Saginaw, Michigan sold for
about 40% less than its US$67.5m appraised value from 2012,
according to Morgan Stanley analysts.
Analysts said the slump in property prices is fanning fears
that losses on CMBS backed by the rental proceeds of this mall
could be heavier than some were anticipating.
The Macy's store closures will also likely have
ramifications for bondholders.
Some US$3.6bn of property loans packaged into CMBS deals
since 2010 could be impaired, Morningstar Credit Ratings
And as shoppers shun physical locations in favor of online
shopping, many more retailers could also close stores - paving
the way for even more widespread losses for bondholders.
"Indeed, Coach, Michael Kors and Ralph Lauren all recently
said they were pulling out of or reducing inventory in
department stores," Morningstar said.
SEEKING THE RIGHT PROTECTION
The sour sentiment has investors looking for more protection
that can be added relatively fast, and the CMBX 6 index appears
to be the best bet for now.
It references 25 CMBS bond deals created in 2012 when loans
on malls and retail centers were all the rage.
"If you are long deeper credit in CMBS from a retail
perspective, CMBX 6 is the best hedge because it has the most
retail," Colin McBurnette, a portfolio manager at Angel Oak
Capital, told IFR.
The balance is small compared with the US$676.5m of AAA
gross notional traded on CMBX 9 during the last full week of
But it still reflects rising anxiety in the high-stakes BB
sector - even if some believe the move in spreads is overdone.
"We know demographics are a factor," said Brian Phillips,
director of commercial real estate credit research at
"As America moves to core urban sectors, it does leave
behind a lot of real estate that becomes obsolete."
(Reporting by Joy Wiltermuth; Editing by Helen Bartholomew,
Natalie Harrison and Shankar Ramakrishnan)