JC Penney woes add more angst to CMBS market


By Adam Tempkin

NEW YORK, Oct 4 (IFR) - The fate of struggling big-boxretailer JC Penney, which has the largest tenantexposure overall in legacy CMBS, weighed heavily on CMBS thisweek, adding even more pressure to a market already reelingunder uncertainty over the government shutdown.

About 420 CMBS loans totaling US$34.4 billion have exposureto JC Penney (JCP), according to research released this week byRichard Hill, the head of CMBS research at Morgan Stanley.

That is almost double the assessments of JCP exposure making the rounds in the market over the past two weeks due tothe inclusion of "shadow exposure", where the retailer is atenant at a mall that is in a CMBS deal, but is not technicallyin the loan collateral.

Hill, who scoured Co-Star's broker database, also found that40% of all properties with JCP as a tenant are encumbered byCMBS debt, which increases the likelihood that store closingswill impact the market.

"All of this suggests to us that there is heightened needfor CMBS investors to monitor their exposure to the retailer,"Hill said.

JCP's unexpected US$810 million capital raising last week toshore up liquidity sparked fears of either eventual bankruptcy,or at the very least, store closings, which would have adetrimental impact on CMBS deals collateralized by loans on thecompany's chain stores.

"An unusual confluence of mainly negative factors have sortof conspired against CMBS of late, but I think that it wasmainly the JCP news that was the key volatility stimulus overrecent sessions," said Christopher Sullivan, chief investmentofficer of the United Nations Federal Credit Union.

This year alone, 43 loans originated totaling US$3.4 billionacross 21 deals have exposure to JCP, Hill said. That hasprompted some rethink about what may be ahead for those dealsand others like them.

"The sort of underlying risk re-introduced to investors byJCP, combined with a trend of weaker underwriting and structurallaxities/deficiencies, will likely force spreads wider andprobably increase investor resistance to certain deals," saidSullivan.


Even if anchor tenants such as JCP are not part of a CMBScollateral pool, the closing of their stores affects the foottraffic - and ultimately the revenue - of other stores that are.

Mall collateral, in general, has caused consternation amongCMBS investors over the last year.

The latest concern about the future of JCP adds a freshsource of headline risk to a market already on edge over thedirection of interest rates, a potential rise in funding costs,and a gradual deterioration in underwriting.

"Investors are reluctant to put money to work where there isstill some uncertainty over the timing and magnitude of theFed's tapering of asset purchases and the implications of thedebt ceiling debate," said Hill.

The impact on secondary-market trading has been acute withlow volumes and widening spreads.

"The daily offer sheets distributed by dealers this weekshow spread widening versus tightening in a 5 to 1 ratio forlast-cash-flow CMBS bonds," said Adam Murphy, president ofEmpirasign Strategies, a capital markets data provider thatclosely tracks securitized-product secondary trading.

Uncertainty has also spilled over to the new issue market,with deals taking longer to get done and guidance widened.

The Triple A 9.88-year slice of a US$1.2 billionmulti-borrower CMBS conduit from Deutsche Bank and CantorFitzgerald (COMM 2013-CCRE11) that has some JCP exposure in oneof its largest loans, priced 10bp wider than price talk onWednesday.

It also printed 14bp wider than a similar tranche of a dealthat priced on September 20, the US$754.45 million COMM2013-LC13, which was also led by Deutsche Bank.

The COMM 2013-CCRE11 deal, meanwhile, took six trading daysfrom announcement to pricing, compared with three days for theprior transaction in the series, COMM 2013-CCRE10, which pricedin early August.

The widening on the new-issue conduit "helped drag CMBS 3.0bonds wider by three or four basis points in the secondarymarket," Trepp analysts said in a report on Thursday.

Securitization experts expect investors to begin to pay moreattention to the specific collateral underpinning each deal.

"There will be more tiering amongst deals; the market willbecome less homogeneous than before," said a CMBS trader.

Some investors may even delay purchases.

"Two significant variables in the outlook for rates - thecontinuation of the Fed's bond buying program, and the potentialmarket disruptions associated with debt ceiling negotiations -do not lend themselves to quantitative modeling," said MarielleJan de Beur, a CMBS analyst at Wells Fargo Securities.

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