The shakeout in the sporting goods industry continued to impact commercial mortgage bonds, as Sports Chalet is closing stores that are tenants in properties backing 11 CMBS loans.
The parent company of Sports Chalet, Vestis Retail Group, filed for bankruptcy Monday, two days after announcing the closure of all of its stores.
"After reviewing a variety of strategic alternatives, we determined that the best path forward is to separate the businesses and confront the challenges that have been hindering our overall progress," Vestis said in a statement.
According to Morningstar, $628.9 million in CMBS could be affected by the move. The sporting goods retailer has reportedly already began liquidation sales at all 47 stores, the rating agency noted.
Vestis’ other chains, Eastern Mountain Sports and Bob’s Stores, will also be closing some of their stores. While none of those stores are tenants in properties backing CMBS loans, Morningstar still believes that Vestis could close additional stores affecting nine loans totaling $141.7 million where Eastern Mountain Sports and Bob’s Stores are collateral tenants.
Vestis became the second major sporting goods retailer to file for bankruptcy this year, following The Sports Authority in March 2016. That came on the heels of Orange County-based Quiksilver, which filed for bankruptcy protection in September 2015, closing 20% of its stores, while Boston-based City Sports filed for bankruptcy protection and closed all of its stores in 2015.
A combination of poor execution and stiff competition from stronger retailers such as Dick’s Sporting Goods and online retailers have affected sales for chains in this sector, according to Morningstar.
Vestis, which is owned by Versa Capital Management, a Philadelphia-based private-equity firm, added Sport Chalet to its portfolio in 2014, when it acquired the chain for $70 million, including the assumption of $52 million in debt. Sport Chalet has 47 locations in Nevada, Arizona, and California.
According to Bloomberg, one Bob’s Stores location and eight Eastern Mountain Sports stores will also close, none of which are collateral tenants. However, Morningstar believes that both of these chains may be at risk of more closures as the bankruptcy case progresses.
The credit rating agency identified 11 CMBS loans exposed to Sport Chalet, several of which have significantly elevated risk of term or maturity default.
Crossroads Marketplace, a 239,912-square-foot power center in Chino Hills, California that backs a $63 million loan in CGCMT 2007-C6, could become the most at-risk loan as a result of the closure. Sport Chalet is the largest tenant, with 42,000 square feet, or 17.5% of the total space. The closure of this store would follow the loss of the center’s Best Buy store and would leave the property with 98,000 square feet vacant.
Grand Plaza, which secures a $78.9 million loan in CD 2007-C4, could become a maturity risk in January 2017. The property, a 352,672-square-foot power center 35 miles north of San Diego, generated cash flow that was about 12% below issuance. Sport Chalet occupies 11% of the space, which could push the 1.13x DSCR to break-even, making refinancing the loan challenging.
Two loans, the $15.4 million Conejo Valley Plaza loan in MSC 2006-IQ12 and the $17.8 million Scottsdale Retail Center loan in MSC 2008-T29, will also face high term default risks as a result of the closures. The Sport Chalet stores at these locations occupy 64% and 40% of the space, respectively, and will push cash flow at both properties well below break-even.
Morningstar sees lower levels of risk in four other locations backing CMBS loans: Nut Tree Center ($67.0 million in GSMS 2013-GC10), Burbank Town Center ($182.3 million in JPMCC 2006-LDP8), and Westfield Mission Valley ($100.0 million WFRBS 2013-C16 and $55.0 million WFRBS 2013-C17). It noted that Sport Chalet occupies smaller percentages of the properties, and cash flows will likely absorb the loss of this tenant.
