$ 700 Million Commercial Mortgage-Backed Securities Portfolio Sits on the Brink as Shopping Malls Crumble | News and analyzes



Downtown Boca Raton is nearly empty on May 15, 2020 in Boca Raton, Florida. | Source: Getty Images

NEW YORK, United States – Bond investors who bet on a mall group owned by Barry Sternlicht’s Starwood Capital Group begin to take losses after the Covid-19 pandemic closed stores and wiped out emergency cash reserves that were holding payments of interest.

The commercial real estate bond, known as the Starwood Retail Property Trust 2014-STAR, is backed by an overdue loan of nearly $ 700 million. It cuts interest payments to investors for the second time, after a reserve account dried up in June and a significantly lower real estate valuation caused the server to withhold some funds.

The bond’s performance shows how quickly the pandemic is worsening losses in a sector that was already crushed by online shopping. Even the portion of the bond deal that was once rated AAA – meaning bond valuers saw virtually no risk of losses just two months ago – has now been slashed deeply into unwanted territory.

“The Starwood CMBS Mall experience is certainly symptomatic of the larger narrative,” said Christopher Sullivan, director of investments for the United Nations Federal Credit Union. The weakening fundamentals of shopping center assets and the decrease in the number of willing investors “will present permanent funding problems”.

A Starwood representative declined to comment.

In July, S&P Global Ratings downgraded Starwood’s entire commercial mortgage-backed security to a speculative rating after a revaluation of the four regional debt-backed malls valued them at 66% lower than when the bond is issued.

And while the lending agent, Wells Fargo & Co., and the borrower is hoping to restructure or modify the loan, the pandemic has put those plans on hold for now, according to a comment from Wells.


The server started reducing interest payments since June because the significantly lower valuation triggered a CMBS protection mechanism known as the valuation reduction amount. With so much lower valuation, ARA limits the amount of interest that service agents have to advance on loans when the value of the underlying collateral has declined.

The idea is that the server will hold the funds longer to protect senior bond holders.

“Due to the amount of the appraisal reduction in place, the agent is only advancing on a portion of the mortgage,” said Dennis Sim, CMBS analyst at S&P.

Starwood’s loan defaulted on maturity last November when the borrower was unable to refinance, but the manager paid investors into a declining reserve account until June. Wells Fargo is now advancing smaller interim payments out of its own pocket.

The total debt on the properties is $ 682 million. It is linked to shopping centers anchored by service chains in difficulty or in bankruptcy, in particular Nordstrom Inc. and JC Penney Co.

The obligation included debts related to regional shopping centers, including The Mall at Wellington Green in Wellington, Florida, The Mall at Partridge Creek in Clinton Township, Michigan, and MacArthur Center in Norfolk, Virginia. Ailing collateral anchor Nordstrom has closed stores in all three locations, according to Trepp.

The initially AAA-rated CMBS tranche was last listed at 69 cents to the dollar, according to Bloomberg data.

The percentage of overall CMBS loans assumed by special training services is increasing from 9.49% in July to 10.04% in August, according to Trepp. About 17.3% of retail loans were on special duty in August, up from 16% in July, according to data from Trepp.

By Adam Tempkin


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