Via Financial Times

Wall Street’s “big short” against US retail has inflicted painful paper losses on AllianceBernstein, a mutual fund house on the other side of the trade, which has insured debts owed by shopping malls that face disruption or closure in the coronavirus pandemic.

More than two dozen funds managed by AllianceBernstein have sold about $4bn worth of protection against mortgages owed by American shopping centres and other commercial borrowers. Retail sceptics, including the veteran investor Carl Icahn, have wagered that mall owners will be unable to meet their debts.

The derivatives bet is based on the so-called CMBX 6 index of mortgage-backed securities, which has a large exposure to retail. Its junk-rated BB tranche has fallen 25 per cent in the past fortnight, indicating higher expectations of default, as one major shopping centre operator closed all its properties and another moved to reassure investors about its financial strength.

AllianceBernstein’s $29bn American Income Portfolio is down 15 per cent since the beginning of March, having written $1.9bn of protection on CMBX 6, while some of the group’s smaller funds have higher concentrations. 

The trade reflects a conviction that American malls are “evolving, not dying,” as the firm put it last October, in a paper entitled “The Real Story Behind the CMBX. 6: Debunking the Next ‘Big Short’”.

That paper subsequently disappeared from AllianceBernstein’s website, but was replaced on Friday, shortly after the Financial Times asked about it.

“We definitely still like this,” said Gershon Distenfeld, AllianceBernstein’s co-head of fixed income. “You can expect this will be on the potential list of things we might buy [more of].” 

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One of America’s biggest mall operators, Simon Property Group, has closed all its US properties until March 29. 

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Another listed property fund, run by Canadian asset management group Brookfield, on Friday moved to reassure investors about its financial health. “We continue to enjoy the sponsorship of Brookfield Asset Management,” the group said in a statement, adding that its parent company was “in excellent financial condition should we ever require assistance”.

Executives at AllianceBernstein said the paper losses on their CMBX 6 positions in the past fortnight reflected outflows of capital from high-yielding assets that investors see as risky. They added that the trade outperformed last year. 

Even if some borrowers ultimately default, CDS owners are not likely to be owed any cash for several years, said Brian Phillips, a senior vice-president at AllianceBernstein.

He believes any liabilities under the insurance will ultimately be smaller than the annual coupon payment the funds receive. “We’re going to continue to get a coupon from Carl Icahn or whoever — I don’t know who’s on the other side,” Mr Phillips added. “And they’re going to keep [paying] that coupon in for many years.”