Deutsche Bank Says Next Big Short Is on CMBS as Malls Suffer (Sears Climbs On Restructing Despite Dismal Earnings)

Deutsche Bank of Greg Lippmann and “The Big Short” fame has a dire warning of ANOTHER possible big short situation: commercial mortgage-backed securities (CMBS) backed by retail mall loans.

Analysts at Deutsche Bank AG, one of the biggest underwriters of bonds tied to U.S. commercial mortgages, say now it’s time to bet against the securities.

The bonds are vulnerable because they are supported in part by leases from retailers, a lagging part of the economy, wrote Ed Reardon and Simon Mui in a note this week. A combination of bankruptcies and closures could lead to faster-than-expected mortgage defaults for stores and malls, as long-term pressure from internet competitors wears many companies down, the analysts wrote. …

Deutsche Bank advised buying credit default protection on the parts of CMBX indexes that are a single step above junk (the Markit CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities., known as the BBB- tranches). Morgan Stanley recommended betting against portions of those indexes last week. The BBB- rated portion of the 2012 Markit CMBX price index, known as the series 6, has been falling since the end of January.

cmbxseries6

That index traded at 90 cents on the dollar on Wednesday, compared with 95.2 cents on the dollar on Jan. 27, according to data compiled by Bloomberg. The price has dropped as wagers on the index have climbed in recent weeks, reaching $2.3 billion at the end of last week, according to Depository Trust & Clearing Corp. data.

“Big mall loans have outsize losses for investors,” said Morningstar analyst Edward Dittmer. “We expect the stores like Sears, Macy’s and Penney to close more stores later this year and next year, and as they close, there will be knock-on effects that lead to other mall tenants leaving. This can start the cycle of blight.”

And on that note, Sears announced a $1 billion restructuring plan

Sears Holdings Corp. rose as much as 52 percent in early trading after Chief Executive Officer Eddie Lampert vowed to fix the troubled retailer, saying he would lower its debt burden and cut annual expenses by at least $1 billion.

The cost savings will be part of a push to reduce overhead and more tightly integrate the Sears and Kmart operations, the company said on Friday. Lampert, 54, also plans to slash debt and pension obligations by $1.5 billion.

Tighter integration of Sears and the virtually nonexistant Kmart (at least in Northern Virginia) and slashing pension obligations? Refinancing their corporate debt at low rates could reduce expenses without harming pensions. Nevertheless, Sears stock price rose 54% at opening, then simmered down.

searsbig

You can barely see the uptick in Sears price in this stock price chart since 2015.

sears2015

The last earnings report for Sears was dismal, so we will have to wait to see how Sears $1 billion restructing will combat Amazon.

searsearnungs

As of January 2016, Sears had already closed 150 stores impact 22 CMBS deals.

Let’s hope this isn’t another “The Big Short.”

jared

 

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