Hedge funds and other short sellers are beginning to set their sights on a U.S. credit-derivatives index with outsized exposure to hotel debt as the pandemic sinks the hospitality industry into distress.
The firms are starting to build up wagers against the synthetic index, known as CMBX 9, shifting attention from a high-profile bet against America’s challenged malls. The shift, which market participants say is beginning to show up in some trading flows, comes as delinquencies on hospitality property loans surge and even begin to exceed those in retail.
“In the last month there has been more selling pressure on the CMBX 9 than any of the other CMBS indices,” said Dan McNamara, a principal at MP Securitized Credit Partners, a hedge fund focused on shorting commercial mortgage bonds. “That’s because some hedge funds are actively looking to play the short side on the Series 9 index due to its significant hotel exposure.”
Retail debt has been a lucrative bearish bet this year as people stayed home amid lockdowns and shopped online, exacerbating an existing threat to brick-and-mortar stores. Traders have been taking positions on retail through a 2012 version of the commercial mortgage index called CMBX 6, which has a high concentration of debt tied to shopping malls.
“Funds have been coming out of the CMBX 6 and moving onto the CMBX 9,” said Christopher Sullivan, chief investment officer of United Nations Federal Credit Union. “The CMBX 6 trade has gone a bit long in the tooth and is now more fairly priced given the likely pandemic effects. We can see this series becoming the favorite option now.”
Hotel loans make up about 17% of the commercial mortgage debt underlying the CMBX 9 index, which is tied to 25 commercial mortgage securities created in 2015.
The debt includes a now-defaulted $200 million loan backed by 50 extended-stay hotels owned by Starwood Capital Group. The loan was relatively stable at the end of 2019, according to Fitch Ratings, but defaulted at maturity in July because of lost business during pandemic-induced shutdowns.
Hotel Pain
Nearly 25% of hotel loans in CMBS are now delinquent, Cantor Fitzgerald LP researchers said in a Wednesday note, compared to about 20% for anchored retail loans. Across the broader CMBS universe, about 10% of hotel loans securitized in bonds are now more than 90 days overdue, compared to only 3.7% for retail loans, according to Darrell Wheeler, head of research at the New York-based firm.
The BBB- tranche of the CMBX 9 series fell to 65.5 cents on the dollar by late April from almost par in early March. It’s since gradually fallen in price to 79 cents on the dollar Thursday from its mid-June peak of about 85 cents.
UNFCU’s Sullivan said CMBX 9 trading volume has been increasing for well over a month, and was among the most actively traded across CMBS indexes for several days in July and August, according to aggregated swap depository data compiled by Bloomberg. Total cumulative trading volume for all tranches of the CMBX 9 increased to $258.5 million on Aug. 26 from $30.2 million on July 28, the data show.