Can Technology Freshen Up Stale CMBS Ratings?

Sears' recent bankruptcy filing underscored the challenges confronting shopping malls in the late 2010s. Because mortgages on these facilities often account for the lion’s share of CMBS asset pools, shopping mall performance needs to be top of mind for those analyzing (or rating) CMBS tranches.

New technology – originally targeted at investors analyzing retail sector stocks – might also be applicable to CMBS analysts.

Foot Traffic

Consider, for example, Advan Research. The company processes billions of daily foot traffic measurements from cellphone applications, and computes foot traffic data pertaining to 1,800 companies including both retailers and Real Estate Investment Trusts. Since many REITs own shopping malls, the company collects foot traffic data for these retail centers.

I asked Advan for data on a mall discussed in a previous post. A mortgage on The Mall at Stonecrest in Lithonia, Georgia accounts for almost all of the remaining collateral supporting Banc of America Commercial Mortgage Series 2005-1. Fitch rates the most senior remaining tranche, Class B, at Single-B. S&P assigns the same tranche a low investment grade rating of BBB-. 

Who’s right? The data from Advan suggests a downward trend in foot traffic at Stonecrest, as shown in the accompanying chart. Average estimated visitors for the five Saturdays in July 2017 were 19,816; for the five Saturdays falling 52 weeks later, the average fell to just 12,659. On the other hand, a similar comparison between October 2017 and October 2018 shows only a slight drop, suggesting that perhaps the decline in visits has been arrested. 

To the extent that Advan’s data can be relied upon, it seems to give us a more recently refreshed gauge on the shopping mall’s health than other data sources. Certainly, the trustee report is not giving us up-to-date guidance. The November report includes the following special servicer comments: 

Modification closed and funded 8/5/2017. The loan is currently paying as agreed. 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. A new appraisal has been ordered and received. Valuation is under review. Maturity Date extend to 8/1/18; principal reduction in the amount of $1,233,073.95 for a balance of $92,066,680.26; no change in rate of 5.603%. 

These comments do not appear to have been revised since the most recent term extension for the Stonecrest mortgage which was through August 1, 2018.

Social Media and Other Sources

In addition to reviewing foot traffic, analysts can monitor the web and social media for news about relevant shopping malls. For example, a local newspaper, the Springfield News-Sun, reported that nearly 100 cars in the mall’s parking lot were broken into on October 5, 2018. A nail salon employee at Stonecrest argued that the mall does not provide video surveillance of the parking lot, making it harder to identify and apprehend any wrongdoers. A search for #stonecrestmall on Twitter reveals that a shooting occurred at the center – but it took place three years ago.

While it is possible to use free tools like Google Alerts to monitor individual shopping centers, that approach might not scale well to a large portfolio. Specialized search services like Bitvore (for which I used to consult) enable analysts to track news on large numbers of positions, even allowing news searches by CUSIP number.

Cell phone activity, web content and social media posts offer new ways for rating agencies and other analysts to track CMBS mall collateral real time. Finding or compiling the nuggets of useful data from these information streams is a challenge that new technology firms can help solve.


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This piece was written by Marc Joffe, who consults for PF2.  Marc Joffe is a Senior Policy Analyst at the Reason Foundation and a researcher in the credit assessment field. 

S&P Maintains Investment Grade Rating on CMBS Tranche Mainly Collateralized by a Defaulted Loan

The Class B notes of Banc of America Commercial Mortgage Series 2005-1 (BACM2005-1) are currently collateralized by two commercial mortgages.  

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. 

SEC Shines a Light on Inflated CMBS Ratings

On January 21, S&P settled a number of complaints with the Securities and Exchange Commission as well as two states’ attorneys general.  The issues primarily involved ratings of Commercial Mortgage Backed Securities (CMBS), although the rating agency also paid a relatively small fine for a self-reported lapse in its RMBS monitoring.

The settlements show that the SEC making use of the new regulatory powers it gained under Dodd-Frank and the earlier Credit Rating Agency Reform Act of 2006. While the complaints illustrate the fact that commercial considerations continue to affect credit ratings in the post-crisis era, regulators were able to identify and address (some of) them before another disaster occurred.

The CMBS market is much smaller than RMBS market was in its heyday, so a wave of unanticipated CMBS defaults may not have been enough to trigger another financial crisis on its own.  Nonetheless, it is nice to know that (some) misbehavior was caught early -- so we won’t have to find out.

Another difference between the contemporary CMBS market and the RMBS market of yore is greater competition. Six rating agencies currently vie for CMBS ratings mandates:  the “Big Three” plus DBRS, Kroll and Morningstar.  Neither Kroll nor Morningstar was around when bankers were shopping for higher RMBS ratings a decade ago.

After S&P temporarily suspended CMBS ratings in 2011, its market share position was quickly captured by Kroll. S&P’s subsequent misstep - distorting a Great Depression data set to justify lower AAA credit enhancements – was likely motivated by the fear of being permanently dislodged from the top three in a highly profitable asset class.

Ironically, the SEC enforcement actions, which include a one year suspension of conduit CMBS ratings, will cement S&P’s also-ran status. A takeaway here is one we have warned of many times previously: that more competition results in more ratings shopping by issuers and more pressure on rating agencies to dumb down their criteria - the type of concern that had motivated the Franken Amendment.

Competition in the Market for Single-Asset CMBS

S&P can still compete with the other players in rating single asset CMBS – a category that should worry any observer of the rating agency business. As the name suggests, single asset CMBS deals are collateralized by a mortgage on just one commercial property. The property can be an office building, a hotel or a shopping mall.

Typically investors in AAA structured finance paper have at least two protections:  seniority and diversification. With AAA securities at the top of the heap, collateral defaults usually have to destroy most or all of the value of more junior securities before the AAA holders are impacted. The second protection afforded to AAA structured finance investors is diversification:  the fact that the collateral pool contains a large number of loans whose risk attributes can be expected to offset one another.

Single asset CMBS deals kick this second protection away.  If the one loan backing the deal stops performing and has to be liquidated at a large discount, all investors lose – including those holding AAA paper.  The question in rating these deals is thus a fairly simple one:  what are the odds that the property will suffer a catastrophic loss in value?

According to the Moody’s idealized default probability table, the default probability on Aaa securities should be 0.0001% annually.  For an instrument rated Aa1, the annual default probability should be 0.0006%.  Differentiating between an event that has a 1 in 100,000 probability from one that has a 1 in 16,667 probability is difficult for any mere mortal – even one that happens to be employed by a credit rating agency.

But is it really credible to believe that any given shopping mall has just a 0.0001% chance of a catastrophic decline in value?  A brief review of recent history should refute this notion.

We have already seen one shopping mall devastated by a terrorist incident.  Although this tragedy happened in Nairobi, similar events are possible in the US which has already seen mass shooting incidents at Florida and New Jersey shopping centers.  But shopping malls can easily be laid low without an act of violence.  The closing of an anchor store or the opening of a competing mall can decimate traffic in short order.  And these aren’t theoretical possibilities as one can see by perusing the Dead Malls website.  This site lists over 100 US shopping malls that have closed or become largely vacant in recent years. Indeed, the rise of standalone big box stores like Walmart and the increased popularity of online commerce have placed enormous pressure on the entire shopping mall business.  Earlier this month, large tenants Macy’s and J.C. Penney both announced the pending closure of tens of stores around the country.

With such obvious risks, it’s hard to understand how a security collateralized only by a single shopping mall loan could be rated AAA.  Yet despite previous defaults on AAA shopping mall loans (see below) we continue to see AAA single shopping mall deals in the aftermath of the financial crisis.

Interestingly, the two pre-crisis shopping mall transactions with defaulted AAA securities weren’t single loan transactions – but they were overly dependent on individual loans that went bad.  Bear Stearns Commercial Mortgage Securities Trust 2007-PWR15 contained a loan to Las Vegas’ World Market Center II that accounted for 12.3% of the deal’s collateral pool. The default on this loan, in 2010, together with a large loss on the Aiken Mall in Aiken, SC have proved sufficient to trigger losses on the Aaa-rated AJ class.

CSFB Commercial Mortgage Pass-Through Certificates Series 2005-C2 included an exposure to the Tri-County Mall in Cincinnati that accounted for nearly 10% of its collateral pool. The liquidation of this mortgage at a deep discount eventually inflicted losses on AAA investors.

Despite these cautionary tales, we now have at least seven post-recession deals, with 100% exposure to a single shopping center, carrying AAA senior ratings.  These deals and their associated malls are as follows:

Deal	Mall	Location
AVMT 2013-AVM	Aventura Mall	Miami, FL
BBCMS 2013-TYSN	Tysons Galleria	McLean, VA
BBUBS 2012-SHOW	Fashion Show Mall	Las Vegas, NV
CGCMT 2013-SMP	Santa Monica Place	Santa Monica, CA
COMM 2013-GAM	Green Acres Shopping Center	Valley Stream, NY
MSC 2012-STAR	North Star Mall	San Antonio, TX
MSC 2013-ALTM	Altamonte Mall	Altamonte Springs, FL

If readers are aware of others, please pass them along.