Investors who participated in a bond tied to a group of malls owned by Barry Sternlicht’s Starwood Capital Group are starting to incur losses after the coronavirus pandemic shut down malls and tapped out emergency reserves for interest payments, Bloomberg reports.

The bond, known as Starwood Retail Property Trust 2014-STAR, is backed by an almost $700M defaulted loan. It’s reducing interest payouts to investors for second time after a reserve account was used up in June and much lower property valuation spurred the bond’s servicer to hold back some funds.

Earlier this month, the Wall Street Journal reported that Starwood Capital lost control of seven malls it had acquired seven years ago.

Christopher Sullivan, chief investment officer of United Nations Federal Credit Union, sees the development as “symptomatic of the larger narrative” as weaker mall asset fundamentals and fewer investors “present ongoing financing problems,” he told Bloomberg.

In July, S&P Global Ratings downgraded the entire Starwood CMBS to speculative grade after a reappraisal of the four regional malls backing the debt valued them 66% lower than when the bond was issued.

The slice of the CMBS that was originally rated AAA was last quoted at 69 cents on the dollar, according to Bloomberg data.

The loan defaulted at maturity in November when the borrower wasn’t able to refinance, but the servicer, Wells Fargo, paid investors out of a reserve account.

Now, it’s advancing smaller stopgap payments to investors out of its own funds.

Total debt on the properties is $682M; the shopping malls are anchored by department-store chains Nordstrom and J.C. Penney. Nordstrom shut stores at three of the malls.

Plans to restructure or modify the loan were put on hold because of the pandemic, according to Wells Fargo commentary.


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