As the country anticipates a slowdown, investors are wary of headline risk in CMBS transactions In response, a recent report by Salomon Smith Barney compiled a list of CMBS deals with a considerable exposure to weaker retail credits: K-Mart and Circuit City were some of the retailers mentioned that had comparatively higher exposures in CMBS transactions.

The resulting list was not as robust as the bank expected, thus minimizing actual credit risk. However, the bank expects the number of transactions that may suffer from credit deterioration to increase if the economy slows even further, causing headline price risk in the medium term.

"We continue to recommend that investors review transactions for concentrations of retailers because headline risk exists anytime a deal has a high percentage of the same retailer," said Darrell Wheeler, CMBS strategist at SSB.

A factor that investors should consider is the fact that retail concepts are seldom sustainable as evidenced by recent retail closings. The report said this slowdown may cause landlords to actually free up previously leased space for tenants who would pay better rents. Further, the introduction of newer, more profitable businesses would also attract more customers into the malls where these retailers hold business.

"It's not just the space being reused, but the mall traffic would also go up," Wheeler said.

Overall, the bank does not foresee a significant negative credit event being caused by presently troubled retail credits. But the report said that for investors to avoid future headline risk, they should look into their portfolio exposure, specifically focusing on exposure to any single-tenant name.

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