Atlantic City Mall Sparks ‘Macabre Fascination’ in CMBS Market

The Pier Shops at Caesars, the mall on Atlantic City’s boardwalk, failed to attract the minimum bid at an auction, potentially triggering the first-ever loss in a commercial-mortgage bond assigned top ratings during the market’s peak.

C-III Capital Partners, the loan servicer handling the property since the owner defaulted on an $80 million mortgage, canceled the auction yesterday conducted online by Auction.com. The final bid was $25 million, compared with an appraisal of $56.6 million in January 2011, according to Nomura Holdings Inc. The property was estimated to be worth $210 million in 2007, according to data compiled by Bloomberg.

“There was a kind of a macabre fascination,” said Lea Overby, a debt strategist at Nomura. “People were surprised the bids were coming in so low. People had it in their heads that it was going to come in closer to the appraised value.”

The auction result implies a $68 million hit to bondholders, incurring the first principal loss ever on a so- called AJ class of bond referenced in a benchmark index, according to Nomura. Many AJ securities have been cut to speculative-grade after being assigned AAA grades when they were issued.

The loan is the largest in a $1 billion commercial-mortgage bond deal issued by Morgan Stanley in December 2007, Bloomberg data show.

C-III intends to keep marketing the asset, according to Michael Geller, a spokesman for C-III. The auction helps to make clear the true value of the building, Overby said.

“Most people in the CMBS market have gotten the sense that this asset really is near worthless,” she said.

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