CMBS With Department Store Collateral Feels Coronavirus Negative Impact

The coronavirus-induced economic stagnation has led to a decline in retailers’ credit quality and has been bad news for commercial mortgage-backed securities issued for real estate with retail tenants.

A Moody’s Investors Service Inc. report said that overall the pandemic has been bad news for US retailers’ credit quality and CMBS loans for retail properties but concluded that the impact varies across the sector.

Department stores have been the most severely impacted type of retail, especially those department stores that are in enclosed malls and without direct outdoor access. Consumers abiding by social distancing recommendations are expected to be wary of visiting enclosed malls.

“The pandemic, which forced non-essential retailers to temporarily shut their doors, has pushed department stores more than any other retail segment into crisis territory,” report co-author Christina Boni, a VP-Senior Credit Officer with Moody’s Corporate Finance Group, said in prepared remarks.

This means that some department stores are trying to survive the economic stagnation by enhancing their liquidity but those that already were in a lot of debt are at a “distinct disadvantage,” Boni added.

Neiman Marcus, a department store for luxury apparel, on May 7 filed for bankruptcy in light of its accumulating debt and limited cash. On its heels, J.C. Penney filed for bankruptcy as well, becoming the second department store and third major retailer to seek reorganization protection since the onset of the coronavirus.

Other department stores with relatively healthier credit quality are expected to better weather the pandemic such as Nordstrom Inc., which has a Baa3 negative rating, and  Kohl’s Corp., which has a Baa2 negative rating. Kohl’s is benefiting from having stand-alone locations with direct outdoor access that appear to be faring better as consumers avoid enclosed spaces such as malls.

Collateralized loan obligations, or CLOs, exposed to department stores and other retailers are playing some role in the decline of the credit quality of transactions.

“Given the extensive credit deterioration resulting from the COVID-19 pandemic and the subsequent pressure on Caa holding limits, most managers have sold a considerable portion of longstanding distressed collateral,” report co-author Kevin Anthony, Moody’s AVP-Analyst, said in prepared remarks.

Moody’s currently rates CMBSs with collateral comprised of 27.4% retail properties and 7.3% mall properties. For CLOs, the retail collateral exposure sits at 3.7%, down from 6.3% three years ago.