Investors betting on delinquencies in commercial mortgage backed securities

4page_img2Some investors are expecting wide spread defaults among CMBS bonds tied to mall properties. Moodys and Fitch acknowledge the risk of default but see long term stability for retail related securities.

Brick and mortar retailers are suffering from increased competition with online retailers, such as Amazon. A growing share of retail sales are made online and this no doubt hurting traditional storefronts. Some investors have positioned themselves to benefit from defaults among shopping mall owners. These investors are buying up securities tied to retail properties in the expectation of insurance pay outs. But two major credit rating agencies, Moodys and Fitch, offer a different outlook about the future of these securities.

Moodys claims that failing shopping malls pose a marginal risk for the CMBS market. The group cites a stark bifurcation between strong and weak properties. The group claims that weak mall properties only make a small share of retail backed securities. Although they admit there has been a string of spectacular defaults among these weaker properties lately. However these properties only account for a small share of the securities rated by the company. The group estimates about 2.1 percent or 7.3 billion dollars of the 345 billion in securities the company reviews are linked to these weak malls. As these failing retail centers close, related CMBS bonds could be strengthened in the long run. Moodys also adds that recent CMBS issuances are far less exposed to these low tier malls.

Fitch, another ratings agency agrees the main points of Moodys analysis However The company though has been giving greater scrutiny to retail related CMBS bonds issued between 2011 and 2013. Retail is the second largest type of property related to the securities the agency rates. About a third of these retail securities are linked to mall properties. The additional scrutiny given to these bonds suggest Fitch recognizes the risk of default. However Fitch seems to agree with the main conclusion of Moodys analysis. As weaker properties continue to close, retail related CMBS bonds will become more stable. “Weaker malls will disappear and the remaining malls, offering a solid mix of retail, restaurants and entertainment, will be stronger as a result,” said Huxley Somerville, managing director at Fitch.

Still forward thinking hedge fund operators are betting on a wave of defaults, with some taking short positions against retail related CMBS securities. The Depository Trust Clearing Corporation claims that as of March 2017 there was a 985 million dollar increase in the trading of “risky” CMBS bonds, a five fold increase when compared to the first three months of the year. Alder Hill Management has apparently adopted a short position against these bonds and has been stocking up on retail backed CMBS notes. These investors are betting on an impending wave of defaults and large insurance payouts, as more brick and mortar retailers go bust.

The impending wave of defaults on retail related commercial mortgage backed securities is not likely happen any time soon.

These investors may be premature in their assumption that the retail sector will collapse in the near future. Both Moodys and Fitch recognize the risk of default , but claim that shopping malls will only be strengthened by the closure of weaker properties. The two groups also note that fewer new CMBS bonds are tied to these weaker properties and that few outstanding securities are linked to these properties.

In the long run the short position against retail related commercial mortgage backed securities will likely be too expensive to maintain.

Shopping centers are not likely to vanish in the immediate future, according to both Moodys and Fitch. Investors betting widespread defaults aren’t likely to see a major payout any time soon.


Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
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About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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