For the week ending Aug. 21, the BB tranche of CMBX 9 had $95 million of CDS contracts trading in the market, the highest of any series’ BB tier, according to JPMorgan Chase & Co. data. CMBX 6 had the next greatest amount trading, at $35 million.
Retail Short
MP Securitized Credit’s short bet on retail through the CMBX 6 fueled a 75.4% gain in one of its flagship vehicles for the year through July, according to an investor letter seen by Bloomberg. That bearish wager references a basket of 25 CMBS with significant mall exposure.
It’s also produced a $1.3 billion windfall for Carl Icahn, who increased his position after the pandemic shutdowns escalated the already poor performance of mall debt.
So far MP Securitized Credit remains focused on shorting the retail space. The hotel industry has a better chance for a broader recovery than retail, which was already up against secular challenges such as growth in online sales, McNamara said.
Risky Trade
Among the biggest risks in shorting CMBS is mis-timing the wager. That’s what happened to some of the earliest proponents of the CMBX 6 short trade. Hedge fund Alder Hill Management, which had been short the CMBX 6 since at least early 2017, shuttered last year as losses on the wager piled up.
One downside of the CMBX 9 trade is that it doesn’t mature until 2025, while CMBX 6 shorts can get their payouts in 2022. And for short sellers, “CMBX 9 is not as clear cut as CMBX 6, where we expected several BBB- bond classes to take full losses,” Cantor’s Wheeler said.
It’s not clear whether there will be enough two-way volume in the CMBX 9 index to sustain large bets, said Matt Weinstein, a partner at Axonic Capital, a hedge fund specializing in structured products and commercial real estate. But the thesis makes sense, he said. With one in four hotels in CMBS already in default and revenue per available room still down nearly 50% year-over-year, defaults are likely to pile up as forbearance agreements with lenders roll off.
“From a thematic viewpoint, it makes sense to short hotels,” he said.
--With assistance from Claire Boston.
This article was provided by Bloomberg News.