Borders Bookstores filed for Chapter 11 bankruptcy on Wednesday. Bank of America Merrill Lynch analysts noted several weeks ago that this was expected and, at the time, they did a preliminary CMBS tenant exposure report. Their initial list used the tenant information available and trustee reports, which are typically limited to the top three tenants.

Meanwhile, Barclays Capital analysts in a report released yesterday said that the bankruptcy's impact on CMBS should be limited. Only a few deals have property-level exposure to Borders as a tenant of more than 3%. Generally, the Barclays analysts saw 57 loans in 51 CMBS deals, which have an overall loan balance worth $2.8 billion, that are backed by properties in which Borders is one of the tenants.

Borders occupied, according to Barclays, merely 10% on average of these properties in terms of allocated square feet. With this, the tenant-level allocated exposure is merely $222 million. However, Barclays analysts said that there were some locations where Borders was listed as a single tenant, and analysts are mostly worried about these instances.

In most of the retail centers that listed Borders as a tenant, it was typically between number five and number ten in terms of size. This makes it one of the biggest inline tenants, but still comparatively small for an anchor, analysts said. This is why CMBS-allocated exposure is expected to be limited. Additionally, most of the malls are expected to be able to re-lease closing Borders spaces with alternative tenants if their leases are rejected.

For cases in which Borders was not one of the top-three tenants (which are typically noted
in CMBS property-level collateral data), Barclays analysts verified by hand whether the company
was a part of collateral.

They also looked at loan descriptions in PSAs and prospectus supplements or the top loans or verified locations by mapping. They included only the instances where they were able to confirm that Borders was part of collateral in the exposure list. Meanwhile, they excluded instances in which a Borders store was located in a retail center that was securitized in a CMBS deal if the firm was clearly not a part of the CMBS collateral.

Bankruptcy and Company Background

As part of the bankruptcy plan, BofA Merrill analysts noted that the firm also requested court permission to close approximately 30% of its current locations. Store closures and lease rejections are fairly common in retailer's bankruptcy proceedings, they said.

It is clear that those properties where leases are rejected, which can pose added risk to loans that are securitized by these locations. Analysts used Borders' list of store closures disclosed in the bankruptcy filing to produce a more targeted CMBS exposure list.

Borders Group is the second biggest U.S. bookstore chain. The seller has been under pressure lately and, at the end of last year, it reported that lenders had cut the company's borrowing capacity, BofA analysts noted. Several weeks ago it announced the delay of payments to some vendors and landlords that were scheduled for the end of January.

The company cited different external economic and competitive factors that caused the bankruptcy, including the drop in consumer discretionary spending and the increase in competitive forces in the marketplace. This includes the evolution of digital formats for books, music and movies as well as the increase in Web-based retailing.

Borders filed several first-day motions, including one for the court to approve $505 million of debtor-in-possession financing to be used to fund operations. Another one was to allow the closure of a number of locations as well as the liquidation of those stores' assets.

Closing 200 or More Locations

In the court filings, the firm stated that it has determined "closing at least 200 of their 642 stores is absolutely critical to any reorganization process and, to the extent the debtors cannot negotiate favorable lease concessions from landlords, closing up to 75 more stores may be necessary". 

Borders is losing $2 million per week at these stores set to be closed, according to the court documents cited by BofA Merrill analysts.

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