CMBS transactions with exposure to corporate names involved in the recent wave of department store consolidation are in most cases not expected to incur meaningful losses, according to Fitch Ratings. However, analysts recommend investors keep an eye on exposure levels to securities including the specter of the so-called "dark anchor" - such as a closed Robinson's May store causing a drain of business for a small town or suburban mall's neighboring tenants and proving difficult to fill.

Federated Department Stores late last month announced it will close 68 May Co. and Macy's stores next year, a result of the company's merger this fall with May. Overall, the number of independent department store chains has been declining over the last 20 years, to about 20 from more than 60.

Retail exposure accounts for about 30%, or $160 billion, of the $500 billion CMBS market, according to Trepp LLC. Sears and JC Penney, respectively, are the first and second most frequently appearing tenants in CMBS deals in terms of dollar balance of exposure. Kmart Corp. acquired Sears, Roebuck & Co. in March. Big-name department stores make up about 10% to 20% of retail CMBS, said an analyst at Nomura Securities.

"Investors should probably focus on their localized' exposure to any future consolidation, that is, which of these tenants are in the deals that they bought into, and what percentage of the deal do they make up," he said, adding particular attention should be paid to investments in the lower end of the capital structure.

A fair amount of CDO managers have been choosing CMBS collateral over RMBS because of the sector's track record of strong performance, and according to Fitch analyst Karen Trebach, there are enough options for mall owners to turn around slots left behind by closed stores, as well as enough of a credit enhancement cushion, to mitigate default risk.

Roughly 20 Fitch-rated CMBS deals contained exposure to malls with an anchor store to be lost due to the Federated closings. In all except for three of those transactions, the deals were diverse enough to outweigh any significant risk to losses, she said. The largest concern is for those transactions with little diversity and losing an anchor store in a regional mall.

"Would a store closing cause a loss to the loan? In most cases, there is a fair amount of lead time that the mall owner has to re-lease or reconfigure the space," Trebach said. Federated had said it would honor all of its current lease terms. Trebach added that most of the property owners are well-capitalized REITs with a substantial amount of experience managing such properties.

Because regional malls have become more of an entertainment destination for some people, leasing prospects now include a broader array of tenants, including movie theatres and restaurants, according to Fitch.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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