J.P Morgan is lining up $925 million of commercial mortgage bonds backed by a portfolio of Sears stores, according to Kroll Bond Rating Agency

J.P. Morgan Chase Commercial Mortgage Securities Trust 2015-SGP is collateralized by single note, A-1, that is part of a first-lien mortgage loan that was used to help fund Seritage Growth Properties’$2.8 billion acquisition of 235 retail properties, plus 50% of joint ventures that own 31 retail properties, from Sears Holdings.

The mortgage loan has an initial four-year term with two, one-year extension options. It pays a floating rate of interest and no principal for its entire term.

There are two other, $50 million future funding notes, one held by JPMorgan and the other by H/2 SO III Funding I LLC that may be funded as part of the mortgage. If and when funded, these notes will be pari passu with the A-1 note in terms of right to payment but will not be part of the securitization trust collateral.

The 235 properties being acquired are located across 49 states and Puerto Rico; 140, totaling 26.7 million of square feet and representing $123.6 million in total rent, are master leased to Sears Operations LLC and 84, totaling 8.9 million square feet and $37.8 million in total rent, are master leased to Kmart Operations LLC. The remaining 11, accounting for 1.5 million square feet and $11.4 million of total rent, are leased to third-parties.

If Seritage, a newly formed real estate investment trust, opts to use the future funding notes, the money will be used to recapture, redevelop and re-lease space at each property in order to boost revenue and diversify the tenant base.

Among the risks to the deal, according to Kroll, is its high leverage; Kroll calculates the in-trust loan-to-value ratio at 95.3%; after taking into account the existence of mezzanine debt secured by the property but not held by the securitization trust, the all-in LTV rises to 117.3%.

Moreover, the holder of the mezzanine debt intends to securitize it, which could complicate efforts for to obtain consents needed if the mortgage loan enters special servicing.

The “transitional” nature of the leases on many of the properites and the “troubled history” of Sears, the main tenant are also a concern, according to Kroll. Sears has been largely unprofitable since 2012

Nevertheless, Kroll has assigned a preliminary ‘AAA’ to a single, $319 million class of senior, class A notes to be issued by JPMCC 2015-SGP. 

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