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Tuesday, 09 January 2018

The CMBX Trade Against Retail: Has it Paid Off?

Since early last year, a number of opportunistic investors have sought to profit from the expected demise of the physical retail sector. Has the best paid off?

Commercial Real Estate Direct Staff Report

Since early last year, a number of opportunistic investors have sought to profit from the expected demise of the physical retail sector.

They invested in credit-default swaps against subordinate bonds in certain CMBX derivative indices that are tied to CMBS deals with healthy concentrations of loans against shopping malls and retail centers.

The trade gained notoriety last February, when spreads for the BBB- and BB rated components of the indices went through a massive widening. They continued to widen almost steadily until recently. That alone indicates the trade, particularly if executed early, has paid off nicely.

                  CMBX 6/7/8/9/10 BBB- Spreads


                   CMBX 6/7/8/9/10 BB Spreads


                                                                    Source: Trepp LLC

CMBX consists of a series of indices that are each linked to a basket of 25 CMBS conduit deals issued during a particular year. The indices are used as an indicator of the overall performance of the CRE market and enables investors to make bets on corresponding long and short positions.

Investors who expect deals in a specific index to get hit with losses can buy protection. That is, they would pay a fixed-rate premium to a seller of protection who would bet against losses. If losses occur, the seller of protection would cover them. So a short trade becomes most profitable when deals in an index suffer actual losses. It also becomes profitable in the event spreads widen, as they have.

The spread blowout in CMBX has been especially pronounced for the 6 and 7 series, which are tied to CMBS issued in 2012 and 2013, largely due to the perceived greater exposure to struggling mall properties and retail bankruptcies. The focus of the trade has been placed on junior bonds lower in the credit stack because the notes are typically the first to incur losses when distressed loans are liquidated or written off.

Compared to their tightest levels in late January, BBB- and BB spreads for the two segments initially widened between 130 and 295 basis points, respectively, in just two months as word got out about the trade. While the sell-off took a momentary breather in April, spreads for the BBB- tranches of CMBX 6 and 7 by August had resumed their climb and peaked at a year-to-date high in early November that was 358 and 202 bps wider, respectively, than their lows in January.

By the same token, spreads for the lower credit BB bonds in those same indices reached a high that was a staggering 499 and 254 bps wider than their narrowest point roughly 10 months ago. During this devaluation period, the traded price pegged to the BBB- and BB portions of CMBX 6 and 7 series were reduced by 10 to 17 percent as investors rushed to crowd the trade. Prices and spreads for the derivative positions since have recouped some of their losses as the market has begun catching on that the underlying bonds are being priced below their actual worth.

It’s no secret that the retail landscape is in the midst of an unprecedented revolution.

The cause of the blowout in CMBX spreads centers on the idea that the weak performance of certain retailers, particularly JCPenney, Sears and Macy’s, which often anchor class-B and -C malls, would impact the properties they occupy. The three anchors have been shuttering stores by the dozens.

Such closures often trigger co-tenancy clauses for other in-line mall tenants, prompting them to downsize or vacate altogether. The thinking has been that properties, particularly those in secondary and tertiary markets, exposed to the three would see a greater probability of default and losses. As such, those holding short positions in certain CMBX would see a payout.

But has that bet paid off?

Not quite. Retail loans are the largest exposure for both the CMBX 6 and CMBX 7 indices, with a 38.24 percent and 32.4 percent concentration, respectively. But only 1 percent of the remaining balance of retail assets has been marked as delinquent.

CMBX 6 Overview
Property Type % in Series 6 WA LTV WA DSCR WA Debt Yield Avg Occupancy
IN 4.17 64.31%           1.76 16.33% 95.14%
LO 10.65 61.49%          1.96 17.45% 74.70%
MF 5.42 68.41%           1.67 12.75% 92.94%
OF 26.87 66.35%           1.74 13.56% 90.23%
OT 14.64 61.61%           1.99 14.10% 90.54%
RT 38.24 64.17%          1.89 15.16% 94.37%

CMBX 7...


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Data Digest







Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44




cppichart FP



CMBS 2.0 Spreads


Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41





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