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Toys ’R’ Us Highlights Single Borrower U.S. CMBS Risks, Analysts Say

April 12, 2018, 08:00 AM
Filed Under: Real Estate

The effect of Toys 'R' Us' announcement that it will close all 735 of its stores on CMBS transaction TRU Trust 2016-TOYS is a prime example of how retail pressures can affect credit outcomes and how CMBS transactions can avoid risks, says Fitch Ratings. In October 2016, the deal launched and Fitch declined to provide high investment-grade ratings while it was rated up to 'AAAsf' by other agencies. None of Fitch's existing CMBS ratings were changed on the closure announcement.

Media reports have underscored TRU Trust 2016-TOYS as one that will likely see bond losses from the closures. When Fitch was presented with rating the transaction in April 2016 we immediately identified the risk of a specialty operator in a weakening sector including the operator's weak condition (Toys 'R' Us was rated 'CCC' by Fitch at that time), uncertainty around re-leasing (if stores were closed) and the property's high dependence on the operator's business. Fitch will continue to cap ratings on single-borrower transactions with substantial exposure to properties with few other uses.

Transactions secured by commercial real estate are highly exposed to the tenant's performance and the value of the real estate is significantly sensitive to that tenant's occupancy of the space. As such, the ratings analysis has to reflect the additional risks associated with whether the tenant is in occupancy or not, which might significantly increase the likelihood of bond losses.

The Toys 'R' Us closures will not affect Fitch's US CMBS ratings in the near term as the exposure is small at 0.4% of the overall Fitch-rated universe. This universe includes 44 loans totaling $1.55 billion with Toys 'R' Us listed as a top-five tenant, with 38 of these loans were securitized in CMBS 2.0 transactions (from the 2011 through 2018 vintages) and six securitized in CMBS 1.0 transactions (from the 2007 vintage).

Smaller strip centers and neighborhood shopping centers will face the greatest pressure from Toys 'R' Us closures. The loss of a major tenant could reduce foot traffic and in some cases, could trigger co-tenancy clauses and/or lease termination options of other tenants at the property. Regional malls and larger community shopping centers may be less affected due to the more diversified tenant base.


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