A portfolio of $700 million commercial mortgage-backed securities is on the brink as malls collapse

NEW YORK, United States — Bond investors who bet on a group of shopping malls owned by Barry Sternlicht’s Starwood Capital group are starting to suffer losses after the Covid-19 pandemic shuttered stores and wiped out emergency cash reserves that were keeping payment going interests.

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

The bond’s performance shows how quickly the pandemic is compounding losses in a sector that was already crushed by online shopping. Even the part of the bond deal that was once AAA-rated — meaning bond raters saw virtually no risk of incurring losses just two months ago — has now been pushed deep into junk territory.

“Starwood’s CMBS mall experience is certainly symptomatic of a larger narrative,” said Christopher Sullivan, Chief Investment Officer of United Nations Federal Credit Union. Weaker shopping center asset fundamentals and fewer willing investors “will present ongoing funding challenges.”

A Starwood representative refused to comment.

In July, S&P Global Ratings downgraded Starwood’s entire commercial mortgage-backed security to speculative grade after a reassessment of the four regional malls backing the debt rated them 66% lower than at the time of the rating. issuance of the bond.

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


The repairer began reducing interest payments since June as the sharply lower valuation triggered a CMBS protection mechanism known as the valuation reduction amount. With a much lower valuation, the ARA limits the amount of interest managers must advance on loans where the value of the underlying collateral has decreased.

The idea is that the servicer will hold the funds longer to protect senior bondholders.

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

The Starwood loan defaulted on maturity last November when the borrower was unable to refinance, but the manager paid investors from a declining reserve account through 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 tied to malls anchored by struggling or bankrupt department chains, including Nordstrom Inc. and JC Penney Co.

The bond included debt related to regional malls, including The Mall at Wellington Green in Wellington, Florida, The Mall at Partridge Creek in Clinton Township, Michigan, and MacArthur Center in Norfolk, Virginia. According to Trepp, struggling collateral anchor Nordstrom has closed stores in all three locations.

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

The percentage of all CMBS loans handled by special servicers 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, down from 16% in July, according to Trepp data.

By Adam Tempkin

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