Carl Icahn is betting big against shopping malls — to the tune of $5 billion, The Post has learned.
Since last summer, the 84-year-old investor has been throwing money at a complex trade that stands to make him billions if big shopping centers start defaulting on their debt.
The trade is considered risky, and even took down one of Icahn’s former protégés: Eric Yip of Alder Hill Management, as The Wall Street Journal reported in November. But Icahn has plowed ahead regardless on the theory that malls will suffer amid a surge in online shopping.
Only now, the coronavirus has hit — giving Icahn the upper hand far sooner than even he expected, sources said. Meanwhile, his mall short has gotten so large in recent months that it now represents 25 percent of his total assets of $20 billion — his biggest single bet since he invested $5 billion in iPhone-maker Apple in 2013, sources said.
The Far Rockaway native, who declined to comment, is betting against malls through a little-known index that tracks $25 billion in commercial mortgage-backed securities. While that doesn’t sound sexy, it’s riveted segments of Wall Street as it has pitted Icahn against mutual fund giants like Putnam Investments and AllianceBernstein, who are betting that the diversified securities will come out OK even if a few malls default.
As The Journal reported in November, the mutual funds had been winning the battle — until now. Back then, Icahn had just a $400 million short position against the index — dubbed CMBX 6 — making him the largest short seller of mall debt.
Now, with $5 billion in chips on the table, the tide is turning in Icahn’s favor as retailers close shop to stop the virus from spreading.
On Monday, the value of the BBB negative-rated swaps represented by CMBX 6 fell to 68 cents on the dollar, down from 95 cents before the coronavirus forced retailers to close en masse. The A-rated swaps, which face less chance of default, dropped in value to 81 cents from $1.06, according to IHS Markit Data.
And last week, one of the 39 malls covered by the CMBX 6 index, the Newgate Mall in Ogden, Utah, started the process of filing for bankruptcy, sources said.
“The virus is just speeding up the demise of brick-and-mortar retail,” said Dan McNamara of New York hedge fund MP Securitized Credit Partners, which is also betting against CMBX 6. “We expected it to play out over the next one to two years. The virus jammed that into a month. Our thesis got sped up dramatically.”
Icahn’s gains are currently helping him offset losses from other investments tanked by coronavirus fears, including Occidental Petroleum, down 75 percent this year, and hotel and gaming chain Caesars Entertainment, down 50 percent, sources said.
Still, the CMBX 6 winnings are on paper only — and without someone to buy his swaps, he could be forced to wait until 2022, when the securities mature, to cash in, sources said.
Meanwhile, the big mutual funds that are betting in favor of malls meeting their debt obligations say they still expect to come out on top, especially if the government bails out struggling landlords and retailers.
The International Council of Shopping Centers, a mall trade group, has already asked President Trump for “business interruption coverage for retailers, restaurants and other tenants as well as landlords,” citing the “insurmountable strain” the coronavirus has placed on shopping centers.
“Some of America’s 1,100 malls will have to go away,” acknowledged Putnam fixed income manager Brett Kozlowski. But the malls Putnam has insured through CMBX 6 will “highly likely” go through a V-shaped recovery given the stimulus already heading their way, he said, noting that the Federal Reserve recently announced it would buy $250 billion in mortgage securities.
“It is possible that Icahn would have made a fortune on his CMBX 6 bet over time, but the COVID-19 events have already made that a reality – faster than anyone would have imagined,” noted Manus Clancy from data firm Trepp.
Still, the Putnam Diversified Income Trust, more than 20 percent of which is invested in the mall swaps, is down over 17 percent this year.
Putnam in its marketing material for the fund says it “seeks as high a level of current income as Putnam Management believes is consistent with preservation of capital”.
CMBX 6 swaps, like the residential mortgage backed swaps in 2008 that sparked the recession, are traded in a similar way to options and have no bearing on actual mortgage-backed securities.
Those going short pay CMBX 6 holders three percent annually for BBB- bonds, and two percent for A.
Putnam in the fourth quarter said its “mortgage-credit positions accounted for the bulk of the income fund’s outperformance.”
Carl Icahn on March 13 told CNBC that investing for or against shopping malls through credit default swaps was “a little bit like a gambling casino.”
“I think even before this virus, people thought that many of the malls [covered in the CMBX 6] were going to have trouble refinancing” when their mortgages mature over the next two years, said Manus Clancy from data firm Trepp.
“It is possible that Icahn would have made a fortune on his CMBX 6 bet over time, but the COVID-19 events have already made that a reality – faster than anyone would have imagined,” Trepp said.
Simon Property Group, America’s biggest mall operators, has shuttered all of its properties until March 29, and the industry’s trade group, The International Council of Shopping Centers, last week argued “an insurmountable strain” in its request for government assistance.
CMBX 6 prices rise and fall based on the underlying value of $25 billion in commercial mortgage-backed securities that own loans made in 2012 to shopping malls, office spaces and hotels. Forty-seven percent are shopping or strip mall loans.
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