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Biggest US shopping complex shows threat to mortgage-backed bonds

Property sector

Biggest US shopping complex shows threat to mortgage-backed bonds

Vast Mall of America falls behind on payments that help underpin $500bn bond market

The Mall of America in Bloomington, Minnesota, closed its doors in response to coronavirus in March and is now planning to reopen in June © Ariana Lindquist/Bloomberg

The biggest shopping mall in America is delinquent on its $1.4bn mortgage, in an ominous sign of how the pain in US retail is infecting the $500bn market for commercial mortgage-backed securities.

The owner of the Mall of America, a more than 2m square foot complex in Bloomington, Minnesota, that boasts a Nickelodeon Universe indoor theme park and more than 500 stores, missed its mortgage payments in April and May, documents prepared by Wells Fargo and reviewed by the Financial Times showed.

The mall, which was valued at more than $2bn in 2014, closed its doors in response to coronavirus in March and its management has notified Wells Fargo, the servicer overseeing the mortgage, of the hardship brought by the pandemic. It is unclear whether the owner is seeking forbearance on the loan.

The troubles facing the Mall of America, which is planning to reopen in June, are shared by other property owners grappling with lockdowns. Through the CMBS market, which slices loans into bonds with varying levels of risk, strains filter through to the portfolios of pension funds, hedge funds and other investors around the world.

Don Ghermezian, a senior executive at the real estate developer Triple Five Group, which owns the Mall of America, said in an interview with CNBC television last month that without federal assistance, “many malls will be headed into default”.

Triple Five Group and the Mall of America did not respond to requests for comment.

More than one in five loans bundled into US commercial mortgage-backed securities are now on “watch lists” kept by mortgage servicing companies, as administrators raise red flags on loans that have come under stress.

The number of loans appearing on those lists has surged almost 80 per cent since the pandemic began to rattle US financial markets in February. Delinquencies more than tripled in May from the previous month, preliminary data from CMBS data provider Trepp showed.

Some 7.3 per cent of loans bundled into CMBS deals were 30 or more days overdue in mid-May, Trepp said. In April that figure stood at 2.3 per cent.

The owners of hotels, outdoor strip-malls and other shopping complexes have been particularly hard hit by shelter-in-place orders as local US authorities have sought to curtail the spread of coronavirus. Many businesses have chosen to skip rent payments.

“Delinquencies will remain elevated until consumers have confidence to go out again,” said Gunter Seeger, a portfolio manager at PineBridge Investments. Reopening with social distancing in place “may keep some businesses afloat”, he added, “but others aren’t able to survive at less than 60 per cent capacity”.

Executives at Macerich, which owns stakes in 47 malls across the US, also disclosed on an earnings call last week that the company had so far collected just 18 per cent of the rent it was owed for May.

CMBS traders have been quick to mark down the value of lower-rated slices of the securities since the crisis reached US shores. The price of the lowest rated tranche on the CMBS deal backed by the mortgage on the Mall of America has fallen to 40 cents on the dollar from 59 cents at the end of April and 90 cents at the year’s start, according to Bloomberg.

S&P warned the lowest-rated tranche was at “increased risk of default and losses” in March as it downgraded it deep into junk territory.

Additional reporting by Joshua Chaffin in New York

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