• For malls, store closings may be start of a ‘downward spiral’
  • Rating agency identifies $3.6 billion of loans most at risk

Store closures by Macy’s Inc. could hurt more than the mall rats, according to Morningstar Credit Ratings.

Almost $30 billion of bonds backed by commercial mortgages are exposed to the retailer, which last week announced plans to shutter 100 outlets, the rating company wrote in a note on Wednesday. More than $3.6 billion in loans would be affected by the closing of 28 stores that Morningstar identifies as most at risk, several of which support multiple asset-backed securities, the company said.

Macy’s is struggling to reinvent itself for the 21st century as an increasing number of consumers opt to shop online, rather than in physical stores. To this end, the U.S.’s largest department-store company announced plans on Aug. 11 to close some of its less-profitable stores. But for bondholders, Macy’s problems signal further defaults could be ahead for notes backed by malls around the country.

“Losing a Macy’s may not be an immediate death knell for a loan, as cash flow could absorb the vacancy,” Morningstar analysts led by Steve Jellinek wrote. “However, if a mall is hit by two or more anchor closures, that’s typically the beginning of a downward spiral.”

Shifting Landscape

For example, investors can expect a 66 percent loss on a $49.2 million loan for the Hudson Valley Mall, which went into foreclosure after Macy’s and another major tenant left, Jellinek wrote. Loans for malls in Albuquerque, New Mexico; Dover, Delaware; and in Lakeland, Florida, now look vulnerable, he wrote.

Investors in commercial mortgage-backed securities are already braced for an uptick in delinquencies. About $160 billion of loans made in the run-up to the financial crisis come due by the end of 2017, with $49 billion depending on retail borrowers, Deutsche Bank AG wrote in a report this week. Semi-occupied malls could find these loans hard to refinance or repay.

Macy’s and other department stores are “struggling to deal with a shifting retail landscape,” Jellinek wrote.

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