The coronavirus-induced economic stagnation has led to a declinein retailers' credit quality and has been bad news for commercialmortgage-backed securities issued for real estate with retailtenants.

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A Moody's Investors Service Inc. report said that overall thepandemic has been bad news for US retailers' credit quality andCMBS loans for retail properties but concluded that the impactvaries across the sector.

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Department stores have been the most severely impacted type ofretail, especially those department stores that are in enclosedmalls and without direct outdoor access. Consumers abiding bysocial distancing recommendations are expected to be wary ofvisiting enclosed malls.

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"The pandemic, which forced non-essential retailers totemporarily shut their doors, has pushed department stores morethan any other retail segment into crisis territory," reportco-author Christina Boni, a VP-Senior Credit Officer withMoody's Corporate Finance Group, said in prepared remarks.

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This means that some department stores are trying to survive theeconomic stagnation by enhancing their liquidity but those thatalready were in a lot of debt are at a "distinct disadvantage,"Boni added.

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Neiman Marcus, a department store for luxury apparel, on May 7filed for bankruptcy in light of its accumulating debt and limitedcash. On its heels, J.C. Penney filed for bankruptcy aswell, becoming the second department store and third major retailerto seek reorganization protection since the onset of thecoronavirus.

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Other department stores with relatively healthier credit qualityare expected to better weather the pandemic suchas Nordstrom Inc., which has a Baa3 negativerating, and  Kohl's Corp., which has a Baa2 negativerating. Kohl's is benefiting from having stand-alone locations withdirect outdoor access that appear to be faring better as consumersavoid enclosed spaces such as malls.

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Collateralized loan obligations, or CLOs, exposed to departmentstores and other retailers are playing some role in the decline ofthe credit quality of transactions.

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"Given the extensive credit deterioration resulting from theCOVID-19 pandemic and the subsequent pressure on Caa holdinglimits, most managers have sold a considerable portion oflongstanding distressed collateral," report co-author KevinAnthony, Moody's AVP-Analyst, said in preparedremarks.

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Moody's currently rates CMBSs with collateral comprised of 27.4%retail properties and 7.3% mall properties. For CLOs, the retailcollateral exposure sits at 3.7%, down from 6.3% threeyears ago.

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Lidia Dinkova

Lidia Dinkova covers South Florida real estate for the Daily Business Review. Contact her at [email protected] or 305-347-6665. On Twitter @LidiaDinkova.