NEW YORK, Oct 4 (IFR) - The fate of struggling big-box
retailer JC Penney, which has the largest tenant
exposure overall in legacy CMBS, weighed heavily on CMBS this
week, adding even more pressure to a market already reeling
under uncertainty over the government shutdown.
About 420 CMBS loans totaling US$34.4 billion have exposure
to JC Penney (JCP), according to research released this week by
Richard Hill, the head of CMBS research at Morgan Stanley.
That is almost double the assessments of JCP exposure
making the rounds in the market over the past two weeks due to
the inclusion of "shadow exposure", where the retailer is a
tenant at a mall that is in a CMBS deal, but is not technically
in the loan collateral.
Hill, who scoured Co-Star's broker database, also found that
40% of all properties with JCP as a tenant are encumbered by
CMBS debt, which increases the likelihood that store closings
will impact the market.
"All of this suggests to us that there is heightened need
for CMBS investors to monitor their exposure to the retailer,"
JCP's unexpected US$810 million capital raising last week to
shore up liquidity sparked fears of either eventual bankruptcy,
or at the very least, store closings, which would have a
detrimental impact on CMBS deals collateralized by loans on the
company's chain stores.
"An unusual confluence of mainly negative factors have sort
of conspired against CMBS of late, but I think that it was
mainly the JCP news that was the key volatility stimulus over
recent sessions," said Christopher Sullivan, chief investment
officer of the United Nations Federal Credit Union.
This year alone, 43 loans originated totaling US$3.4 billion
across 21 deals have exposure to JCP, Hill said. That has
prompted some rethink about what may be ahead for those deals
and others like them.
"The sort of underlying risk re-introduced to investors by
JCP, combined with a trend of weaker underwriting and structural
laxities/deficiencies, will likely force spreads wider and
probably increase investor resistance to certain deals," said
Even if anchor tenants such as JCP are not part of a CMBS
collateral pool, the closing of their stores affects the foot
traffic - and ultimately the revenue - of other stores that are.
Mall collateral, in general, has caused consternation among
CMBS investors over the last year.
The latest concern about the future of JCP adds a fresh
source of headline risk to a market already on edge over the
direction of interest rates, a potential rise in funding costs,
and a gradual deterioration in underwriting.
"Investors are reluctant to put money to work where there is
still some uncertainty over the timing and magnitude of the
Fed's tapering of asset purchases and the implications of the
debt ceiling debate," said Hill.
The impact on secondary-market trading has been acute with
low volumes and widening spreads.
"The daily offer sheets distributed by dealers this week
show spread widening versus tightening in a 5 to 1 ratio for
last-cash-flow CMBS bonds," said Adam Murphy, president of
Empirasign Strategies, a capital markets data provider that
closely tracks securitized-product secondary trading.
Uncertainty has also spilled over to the new issue market,
with deals taking longer to get done and guidance widened.
The Triple A 9.88-year slice of a US$1.2 billion
multi-borrower CMBS conduit from Deutsche Bank and Cantor
Fitzgerald (COMM 2013-CCRE11) that has some JCP exposure in one
of its largest loans, priced 10bp wider than price talk on
It also printed 14bp wider than a similar tranche of a deal
that priced on September 20, the US$754.45 million COMM
2013-LC13, which was also led by Deutsche Bank.
The COMM 2013-CCRE11 deal, meanwhile, took six trading days
from announcement to pricing, compared with three days for the
prior transaction in the series, COMM 2013-CCRE10, which priced
in early August.
The widening on the new-issue conduit "helped drag CMBS 3.0
bonds wider by three or four basis points in the secondary
market," Trepp analysts said in a report on Thursday.
Securitization experts expect investors to begin to pay more
attention to the specific collateral underpinning each deal.
"There will be more tiering amongst deals; the market will
become less homogeneous than before," said a CMBS trader.
Some investors may even delay purchases.
"Two significant variables in the outlook for rates - the
continuation of the Fed's bond buying program, and the potential
market disruptions associated with debt ceiling negotiations -
do not lend themselves to quantitative modeling," said Marielle
Jan de Beur, a CMBS analyst at Wells Fargo Securities.