Even though TCW Group says CMBS sold in 2012 and 2013 might fall as low as 20 cents on the dollar, the firm isn’t betting against them because it’s hard to know when the wagers might pay off. Plus, the contracts aren’t cheap. It costs about 3 percent a year to short BBB- rated securities and 5 percent to bet against BB notes, plus an upfront fee to put on the trade.
Consequently, it’s “more speculative than it is the next big short,” according to Sorin Capital Management’s Tom Digan.
Whatever the case, here’s what the endgame might look like. About two hours north of Manhattan, in Kingston, New York, stands the Hudson Valley Mall. It used to house J.C. Penney and Macy’s. But both then left, gutting the complex. In January, the mall was sold for less than 20 percent of the original $50 million loan. Mortgage-bond holders exposed to the loan were partly wiped out.
“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss.”
This article was provided by Bloomberg News.