Largest Credit Hedge Fund Bets $1 Billion On Next “Big Short”

Wednesday, March 13, 2019
By Paul Martin

by Tyler Durden
Wed, 03/13/2019

One week ago, when remarking on the sudden slide of the US retail sector into the post-Amazon abyss of irrelevance, when in the span of just 48 hours several big names in the American mall industry announced they would be slashing store counts to the tune of over 300 stores, we said that “the relapse of the sector suggests animal shorting spirits may soon re-emerge” noting that “back in 2017 we, and others, dubbed these U.S. retail store closures as the next “big short”. We said that “just like 10 years ago, when the “big short” was putting on the RMBX trade, and to a smaller extent, its cousin the CMBX, some were starting to short CMBS through the CMBX, a CDS index which tracks the values of bonds backed by various commercial properties.” We explained our reasoning for putting on this short through CMBX versus stocks:

The trade, as we discussed before, is not so much shorting the equities where a persistent threat of a short squeeze has burned the bears on more than one occasion, but going long default risk via CMBX or otherwise shorting the CMBS complex. Based on fundamentals, the trade indeed appears justified: Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up.

To be sure, the trade lost some of its vigor in early 2018, when it seemed that the lows in CMBX BBB- may have been hit with the tranche trading in a tight range for the past 2 years; however we predicted that once the new wave of bankruptcies flows through the mall P&L and a new wave of distress hits the mall sector, we fully expect new lows to be observed in this trade which is basically an inverse bet on Amazon’s continued success in stealing market share from pretty much evereyone.

Well, we were right, because just ten days later, the largest credit hedge fund in the US, Beverly Hills’ Canyon Partners told Bloomberg that it is betting in excess of $1 billion against low-rated debt on U.S. commercial real estate over concerns that valuations are stretched and economic conditions are deteriorating.

“It’s enough to provide a fair bit of insurance in downturns,” Canyon Co-Chairman Josh Friedman said in a Bloomberg Television interview Wednesday in Beverly Hills, California.

While we have been saying that the BBB- tranche of CMBX Series 6 is the next “big short” since 2017, largely due to its overexposure to US malls which are rapidly turning into the next Chinese ghost cities, Canyon’s trade is slightly different.

The Rest…HERE

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