CMBS Outlook Uncertain as U.S. Retail Sector Nosedives

Commercial mortgage-backed securities [CMBS], or bonds backed by a pool of commercial retail properties, are under close scrutiny for possible downgrades as U.S. retailers see their sales nosedive, according to Standard & Poor’s Credit Research.

So far, store closings and bankruptcies such as Circuit City Stores (CC) have not resulted in widespread retail CMBS downgrades, S&P said.

The ratings agency has also concluded that CMBS with exposure to mall operator General Growth Properties (GGP) are not at immediate risk of a downgrade. General Growth Properties warned Tuesday it would be forced to file for bankruptcy unless it could raise capital or refinance its debt.

To date, retail bankruptcies and store closings have not contributed to widespread downgrades, reflecting in our opinion, diversity and limited exposure to troubled tenants. We believe, however, that continued weakness in this sector will likely cause more retail loans to underperform, which would trigger increased delinquencies and could ultimately translate into more retail-related downgrades.

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S&P identified only 14 CMBS transactions with a greater than two percent exposure to troubled retail tenants. CMBS with exposure to bankrupt retailers are more of a concern than those with exposure to retailers that are simply closing stores.

For details, see “The Potential Impact of the Troubled Retail Sector on Rated U.S. CMBS.”

Comments

[Mr. Gil:]

Great article. We may see the commercial real estate market taking a downturn in 2009 as a result of the retail sector. The impact may be just as bad as the residential markets.

2008 Nov 27 04:36 PM