S&P: Bankruptcies May Test CMBS

Though many commercial mortgage-backed securities proved to be resilient last year, Standard & Poor's says it has identified numerous deals involving properties once leased to Kmart and other bankrupt retailers that may soon face downgrades.In a recent commentary, "U.S. Retail: What Will CMBS Do With All of the Space?", the rating agency said relatively few transactions involving properties once leased to Ames, Kmart, and Service Merchandise were downgraded in 2002, but that this situation is likely to change. More than 90 S&P-rated CMBS transactions include mortgages on closed or closing properties once leased to the three retailers, S&P said. Realized losses "have been limited" so far, the rating agency said, but there are several delinquent loans related to the more recent bankruptcies of Ames and Kmart. Therefore, S&P "will most likely lower its ratings on more non-investment-grade bonds as some of the weaker assets are liquidated at high losses," the rating agency said. "In addition, with borrowers attempting to re-tenant and/or sell off the closed Kmart, Ames, and the remains of the Service Merchandise stores in a highly saturated retail estate market, the situation will be very challenging to all."