October 4, 2013 / 4:35 PM / in 4 years

JC Penney woes add more angst to CMBS market

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,” Hill said.

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 Sullivan.

COLLATERAL SCRUTINY

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 Wednesday.

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.

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