Alder Hill Management, a New York hedge fund, issued a report on January 30th making the case against commercial mortgage-backed securities (CMBS) tied to retail properties. According to the report, the firm is expecting more defaults in lower quality malls in 2017. Conforming to trends in other reports, they found a pattern in which fast-changing consumer tastes are pressuring traditional retailers and forcing them to downsize their brick-and-mortar operations at the expense of mall landlords. As a result of their findings, Alder Hill has placed a short position, projecting low-rated CMBS would suffer a 30%-70% loss. One way they have shorted these securities is the CMBX, a little-known credit default swap index that tracks the values of bonds backed by certain commercial real estate asset classes, including malls. Alder Hill called a portion of CMBX, known as CMBX Series 6, a “toxic cocktail” and claimed investors do not fully understand the risks posed by mall-backed loans. The January 30th report has had a significant effect on the prices of CMBX Series 6. Since the release of the report, CMBX Series 6 BBB- and BB-rated securities dropped approximately $5 each to $90.24 and $82.24 respectively.
Alder Hill has not been the only one reporting on such matters. Earlier this month, Deutsche Bank analysts recommended shorting risky slices of debt backed by malls. They pointed to lackluster retail sales over the holidays, which increases the likelihood of store closures and, as a result, debt service default. Class B and C malls, which are located in secondary and tertiary markets with weaker demographics, are at greater risk. They rely more heavily on department stores and other traditional anchor tenants, which have been experiencing historically weak sales. For example, Macy’s and Sears recently announced the closing of hundreds of stores collectively, which affected 60 malls secured by CMBS, totaling 3.5 billion dollars. If this trend continues to cause changes in retail and begins to impact higher quality malls, the effect on CMBS could be more widespread.