It may be a “Bah! Humbug!” moment for a number of property bond investors bullish on shopping malls heading into the holidays.
A series of credit downgrades have hit bonds tied to a several struggling regional malls, even before shoppers line up for Black Friday sales next week.
Fitch Ratings cut its ratings on four junior classes of bonds tied to debt on the Holyoke Mall near Springfield, Mass., and the Sangertown Square in New Hartford, N.Y., last week and dialed down two more lower-rung classes with exposure to the Fox River Mall in Appleton, Wis., and the Eastgate Mall in Cincinnati.
The credit rating agency on Monday lowered its ratings on another eight junior classes with heavy regional mall exposure, giving more grist to investors who are betting on a future with fewer shopping centers.
Billionaire investor Carl Icahn has weighed in with a roughly $400 million wager against mall debt, according to a Wall Street Journal report, intensifying a clash that has long-captivated the mortgage bond market.
And while the decline of U.S. regional malls is nothing new, a shake-out between weaker and stronger properties has begun to look harder to avoid.
Analysts at Fitch see the potential for additional downgrades and “substantial losses” on weaker malls financed a decade ago, particularly in the face of slumping sales, high vacancies and a mound of maturing debt that may face refinancing trouble as lenders have grown more skittish about retail properties.
“We’ve been concerned with malls for the last few years,” said Mary MacNeill, who heads up U.S. CMBS surveillance for Fitch Ratings, in an interview. While 2010 and 2011 loans have benefitted from 10-year terms and low rates, MacNeill said there are no guarantees that malls grappling with shrinking sales and major department stores departures will obtain new financing, or even if some owners will want to stick by their properties.
“A savvy operator is going to pick and chose the malls they want to keep,” she said. “Many malls are owned by big operators, but if they needed to, they could hand the keys back to the lender.”
This chart shows the spike in retail loans coming due through the end of 2020.
Regional malls underpin about 59% of the $2.1 billion of retail property loans coming due through next year, MacNeill said.
Mall operator CBL & Associates Properties /zigman2/quotes/202461654/composite CBL +9.66% already handed back the keys to its Acadiana Mall in Louisiana to lenders in the first quarter and signaled it “will probably return” others to creditors if it can’t achieve a restructuring of debt that “makes sense to us," said chief financial officer Farzana Khaleel Mitchel on the company’s Nov. 1 third-quarter earnings call.
Although the major U.S. stock market indexes were trading lower Wednesday, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.62% , S&P 500 /zigman2/quotes/210599714/realtime SPX +0.36% and Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.35% each set fresh all-time highs earlier this week.