Weaker Malls Prompt Moody’s Change in Bond Assessments

Moody’s Investors Service is altering how it assesses the weakest shopping-mall loans packaged into commercial-mortgage bonds to compensate for a growing number of properties that may struggle to survive.

The gap is widening between strong shopping centers that can attract tenants and those that may be on a path toward liquidation amid “sluggish” economic growth, Moody’s said in a report being published today. After seeing an increase in malls that raise “concerns about their long-term viability,” the New York-based ratings firm said it will account for potentially greater losses for such properties, which it said can make up 5 percent or more of loans backing commercial-mortgage bonds.

“If Moody’s determines that a mall’s long-term viability is in doubt, we may introduce stress scenarios beyond those contemplated in our rating approach, which assumes long-term operational viability as the benchmark,” Moody’s analysts Rob Paltz, Tad Philipp and Nick Levidy wrote in the report.

Retail properties make up a greater share of commercial- mortgage bond deals issued during the past two years than those sold during the market’s boom. Wall Street banks have struggled to compete with other lenders including insurance companies and government-backed Fannie Mae and Freddie Mac on office buildings and apartment complexes, pushing them toward malls and other shopping outlets.

Heavy Concentration

More than 20 percent of investors in a JPMorgan Chase & Co. (JPM) survey cited heavy retail concentration as their primary concern with new commercial-mortgage bond deals, the New York-based bank said in a February report.

Moody’s said that when it rates CMBS deals it’s starting to incorporate an analysis based on how much the weaker properties will be worth if the mall closes or has to be redeveloped.

“Every property has its own story,” Moody’s Philipp said in a telephone interview. “It could be a poor mall in a great location where the solution might be a refurbishment or a new food court. Or you could have a property that needs to be bulldozed.”

The losses on failed malls tend to be higher than for other types of commercial property, the Moody’s analysts said. A mortgage on a mall in Greely, Colorado took a 96 percent loss when it was liquidated in May 2011, according to Moody’s. The $41 million loan was packaged into a $4.6 billion offering in 2006 by Merrill Lynch & Co., the brokerage firm now owned by Bank of America Corp. (BAC), according to data compiled by Bloomberg.

Delinquencies Fall

The proportion of loans linked to retail buildings in commercial-mortgage bond deals rose to 45 percent for bonds sold in 2011, from 25 percent for 2007, according to JPMorgan Chase & Co. More than half the loans in a transaction being marketed by Wells Fargo & Co. (WFC) and Royal Bank of Scotland Group Plc are linked to retail properties.

Late payments on retail mortgages packaged into securities declined 0.16 percentage point to 7.57 percent in April, according to Moody’s. That compares with 7.62 percent a year earlier. The delinquency rate for all property types rose 0.25 percentage point to a record 9.76 percent in April.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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