I'm guessing that you've never heard of Boscov's Department Store. I hadn't. With 39 stores in the mid-Atlantic region, it's hardly a household name. However, the mortgage bond markets have gotten very familiar with that name, to their great discomfort. On the back of a disastrous week for the big money-center banks, which just can't seem to catch a break, Boscov's could be a harbinger of continued losses in the first quarter.
The problem lies with a $117 million sliver of a $1.9 billion commercial mortgage-backed security (CMBS) issued by Bank of America (NYSE:BAC) in 2006. That sliver is backed by seven properties that Boscov closed as part of its bankruptcy reorganization. This month, after a new appraisal showed that the value of the properties had dropped by more than 75%, the bond's servicer reduced interest payments on all tranches of the bond issue up to BBB -- which is investment-grade. That's the sort of rare, unwelcome event which makes mortgage bond investors nervous.
Delinquency rates are increasing
Those investors will find no signs of comfort in the broader market. According to data from Deutsche Bank (NYSE:DB), the delinquency rate on securitized commercial mortgages has almost doubled in the last three months, to approximately 1.2%. Richard Parkus, Deutsche's head of CMBS research, believes the rate could reach 3% this year.
Recent headlines aren't cheery, either. Electronics retailer Circuit City began to liquidate its assets on Saturday; the chain will close its 567 U.S. stores.
Banks and thrifts, which own more than 50% of all commercial mortgages outstanding, should be paying attention:
|
Company |
Commercial Real Estate Exposure |
Comments |
|---|---|---|
|
JPMorgan Chase (NYSE:JPM) |
$7.7 billion |
Securities: $2.7 billion; loans: $5.0 billion |
|
Bank of America (NYSE:BAC) |
$64.7 billion | |
|
Citigroup (NYSE:C) |
N/A |
Writedowns of commercial real estate positions in the fourth quarter: $991 million |
|
Wells Fargo (NYSE:WFC) |
$71.7 billion | |
|
Goldman Sachs (NYSE:GS) |
$14.6 billion* |
Americas: $9.4 billion |
|
Morgan Stanley (NYSE:MS) |
$19.5 billion** |
*As of August 2008.
** At Aug. 31, 2008.
Source: Capital IQ, a division of Standard & Poor's.
Another headache for bankers
The CMBS market held up well through most of 2008, but it experienced tremendous strain in the fourth quarter. Spreads on the Markit CMBX indexes, which track the CMBS market, widened sharply as bond prices fell significantly. While spreads are now lower than their November highs, that trend could continue during this quarter, ushering in more misery for banks and their shareholders.
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