“Retailers Are the New Oil & Gas,” Only Worse

Wednesday, March 8, 2017
By Paul Martin

by Wolf Richter
Mar 7, 2017

I’ve been doom-and-gloom on brick-and-mortar retail. But I haven’t been nearly doom-and-gloom enough, given the events of the past seven days. Includes my interview with The Financial Exchange, WRKO Boston.

Brick-and-mortar retailers, many of them subject to leveraged buyouts during the LBO boom before the Financial Crisis and now burdened with way too much debt, are keeling over one after the other, in a dense wave of debt restructurings and bankruptcies. And creditors are getting skinned.

The crash of brick-and-mortar retail is due to structural causes – including the shift to online retail. These issues will not go away. They will only get worse. Even profitable retailers, like Macy’s, are shuttering stores. They’re all doing it, profitable or in bankruptcy. This is starting to impact the loans these malls are carrying and that have been packaged into commercial mortgage backed securities.

For example, on March 6, Fitch Ratings warned that JC Penney’s plan to close 140 stores over the coming months “will weigh” on the CMBS that are exposed to these malls, particularly since many of these malls face multiple store closings, not just by Penney’s but others as well, including anchor stores, such as Macy’s or Sears:

An initial look into Fitch’s rated portfolio, where JC Penney was listed as a top five tenant, found 136 properties within 122 CMBS transactions. The current outstanding balance of these identified loans with JC Penney exposure is approximately $11.4 billion. The majority, 130 properties, are securitized in CMBS multi-borrower transactions and six in single-borrower transactions.

The potential closure of these stores will have a direct effect on the respective loans regardless of whether the store itself is collateral for the loan. This is due to declining rental income, reduced foot traffic, and/or potential co-tenancy lease clauses affecting the overall property. Added pressure will occur if the malls already have a closed anchor, such as Macy’s or Sears, without re-leasing prospects.

The Rest…HERE

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