One of these mortgages, a $92 million loan on the Mall at Stonecrest in Lithonia, GA accounts for 96.9% of the collateral pool and is in “special servicing” – a fancy name for workout. Yet S&P maintains an investment grade rating of BBB- on this risky instrument.
The most recent remittance report on BACM 2005-1 (available at CTSLink) includes
the following language with respect to the Mall at Stonecrest mortgage:
The loan matures in 8/2018 and the
Borrower advises that the proposed adjacent 100 acre sports project has been
put on hold due to lack of funding.
Although the collateral is 97% occupied, the dark Kohl's and Sears may
trigger some co-tenancy issues. The
Borrower advises it is in the market seeking refinancing, but due to the
current situation with the sports project and 2 dark anchors, refinancing may
not be sufficient to pay off the loan in full at maturity. The Borrower has engaged CREMAC to aid it in
its workout negotiations with the Lender/Special Servicer.
The “sports project” mentioned in the report is Atlanta Sports City, a 200-acre
sports and entertainment complex planned for a plot adjacent to the mall. If and when Atlanta Sports City opens, it will presumably generate substantial foot traffic in the vicinity of Stonecrest. But construction has been delayed
and there is no clear timeline for completing the project, leaving a large
vacant parcel next to the mall for the time being.
Since the servicing note quoted above is dated September 4
and the maturity date was August 1, the Stone Crest loan would appear to be in
default. This default follows an August 2017 loan modification at which time the maturity
date was extended and principal was reduced by over $1 million.
So how can a CMBS tranche backed almost entirely by a defaulted
shopping mall loan be investment grade?
Well, the Class B notes do benefit from “overcollateralization”: two subordinated
bonds would absorb losses on the loan before the BBB- class is impacted.
Fitch appears to have a less sanguine view of this overcollateralization
benefit: they rate the notes at
single B – deep into junk territory. In its latest update, Fitch reported:
The overall mall and collateral
occupancy have continued to decline. As of the September 2017 rent roll,
overall mall occupancy declined to 76.1% (from 85.5% one year earlier) after
Sears vacated its 145,000sf non-collateral store in January 2018.
S&P’s relatively high rating could be the result of insufficient
monitoring, an overly sanguine view of shopping mall collateral or some combination
of both.
S&P’s last report
on BACM 2005-1 is dated March 2, 2018. The write-up does not refer to press
reports about the delay of Atlanta Sports City, so it is unclear whether this
news was considered. Further, the certificates have not been downgraded, placed
on watch or assigned a negative outlook since the latest remittance report
appeared. Since that report indicates that the Stonecrest mortgage was neither repaid
nor refinanced by its August 1, 2018 maturity date, some rating action would
appear to be warranted.
Overrated Shopping Mall CMBS
In 2015, I argued strongly against inflated credit ratings on Commercial Mortgage Backed Securities, especially
those with a collateral pool consisting of a single shopping mall loan. Because
they lack diversification, such deals expose investors to event risk inconsistent
with the AAA ratings assigned to the senior tranches in these deals.
With six NRSROs competing for generous fees on rating CMBS transactions,
the ability for deal underwriters to engage in rating shopping is high and the
incentives for rating agencies to lower their credit standards is strong. Assigning
inflated ratings in any one asset class violates Dodd Frank’s universal rating
symbol mandate, according to which symbols must have the same risk implications across
all asset classes. Moody’s was recently sanctioned by
the SEC for its apparent failure to apply universal rating symbols when rating CLO Combo Notes.
Although none of the single mall deals I listed in 2015 has
experienced credit events thus far, they have yet to be tested by a recession. In the meantime, we have seen abundant evidence
that shopping malls are vulnerable. Brick and mortar retail faces a stiff challenge
from Amazon and other online retailers. Several national retail chains have filed
for bankruptcy or announced large-scale store closures, creating mall vacancies.
Back to BACM
Although BACM 2005-1 launched with a diversified portfolio securing the issued notes,
it had a heavy retail weighting – loans in this category comprised 35.8% of the
initial collateral pool. The Class B certificates received initial ratings of
AA from both S&P and Fitch, levels that proved too optimistic given the performance
of the collateral pool.
Thus far the deal has realized $193 million in cumulative
losses, representing 8.4% of initial collateral. The failure of Stonecrest Mall
SPE to pay off its loan on the original maturity date of October 1, 2014 has left
Class B investors in the deal for a much longer duration than originally expected. This bond’s estimated final distribution date was March 10, 2015 according to the original
prospectus.
What remains now closely approximates a single asset CMBS, but
one with distressed collateral. Class B will probably pay off in full at some
point since junior notes are available to absorb some amount of additional
write-downs. But ratings are supposed to reflect a greater level of precision
than the word “probably” communicates. According
to S&P, obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as
having significant speculative characteristics. That seems to be a fair description
of the BACM 2005-1 Class B notes.
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This piece was written by Marc Joffe, who consults for PF2. Marc is a Senior Policy Analyst at the Reason Foundation and a researcher in the credit assessment field.
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This piece was written by Marc Joffe, who consults for PF2. Marc is a Senior Policy Analyst at the Reason Foundation and a researcher in the credit assessment field.
