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Retailers' pain expected to ding CMBS market

by  | Corporate
Posted:     Updated: Mar 27, 2017  17:30 ET
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It hasn’t been a great month for traditional retailers.

Staples, RadioShack, Gander Mountain and hhGregg announced hundreds of store closings in March.

J.C. Penney Co. identified 138 stores that it plans to shutter later this year.


Most recently, Sears, which was founded in 1886, notified its shareholders that “substantial doubt exists” over whether the company will survive.

Sears Holdings Corp. had a combined loss on its Sears and Kmart stores of $2 billion in the fiscal year ending Jan. 28. The iconic retailer has taken loans in excess of $1 billion from its chief executive officer, the billionaire investor Edward Lampert, to stay afloat.

All of this has exposed billions of dollars in commercial loans underpinning commercial-mortgage-backed securities (CMBS) to a greater risk of default, Morningstar Credit Ratings said.

If Sears goes under, it would expose $30 billion in CMBS loans to heightened risk. CMBS loan exposure from a potential shuttering of Kmart outlets at Class B and C malls amounts to roughly $1.5 billion.

As for the J.C. Penney planned store closings, a dozen CMBS loans with a balance of $885 million are at risk, including seven loans that have already been modified or are in special servicing, according to Morningstar Credit Ratings.

Of the seven most problematic loans involving J.C. Penney outlets, Morningstar is forecasting losses of $177.3 million if the loans are ultimately liquidated. In total, J.C. Penney stores collateralize 330 loans with a total balance of $29.8 billion, Morningstar said.

Morningstar said the greatest threat is at lesser malls in smaller cities. CMBS loans collateralized by malls that also have had other anchor-store closings would be of particular risk of defaults and liquidation losses.

Typically, malls with heavy traffic in good locations haven't had a problem quickly filling spaces.

“Our outlook for those A quality malls hasn’t really changed that much,” said Edward Dittmer, a Morningstar vice president and head of CMBS surveillance.

“Again, in cases where you have a strong mall with good demographics, with good traffic, we still think that the landlords can backfill those Sears spaces in a lot of cases, but in those Class B malls, the smaller centers, which we have always said would have trouble backfilling the space, the loss of Sears in a lot of these properties could really cascade into additional tenant losses going forward,” Dittmer told Scotsman Guide News.


Victor Whitman is chief reporter for Scotsman Guide Media. Reach him at (800) 297-6038 or

Topics: Commercial distressed properties | Commercial niche loans
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Retailers' pain expected to ding CMBS market

by Scotsman Guide Media | Corporate
Posted: Mar 27, 2017  17:27 ET    Updated: Mar 27, 2017  17:30 ET

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