Munis for New York State’s biggest mall cut further into junk

Municipal bonds tied to Destiny USA, the biggest shopping mall in New York state, were cut deeper into junk by Moody’s Investors Service on Wednesday because the complex is unlikely to meet a key measure of profitability needed to extend an outstanding loan.

Moody’s lowered the rating on municipal bonds backed by payments in lieu of taxes to Caa2 from Caa1 and revised the outlook to stable, the company said in a release.

The downgrade reflects an increase in “default risk” because the net-operating-income target needed to extend an existing subordinate mortgage-backed security loan past June 2024 is “unlikely to be satisfied.” 

The municipal debt was originally issued to expand the Carousel Center mall in Syracuse, New York, into a super-regional shopping complex, now called Destiny. 

The bonds were sold in 2007 through the Syracuse Industrial Development Agency. They lost their investment-grade rating in 2019, underscoring challenges for brick-and-mortar retail even before the coronavirus pandemic brought stay-at-home orders.

About $270 million of PILOT bonds are outstanding, according to data compiled by Bloomberg. 

The mall met the first NOI target of $16 million to extend the CMBS loan to June 6, 2024, but the next target is 18.75% higher, “a high threshold that will be difficult to achieve,” Moody’s said. If the threshold isn’t satisfied and the obligor, Carousel Center Company LP, is unable to refinance the loan, then Carousel would enter receivership and the property may be put up for sale, Moody’s said. 

Moody’s expects “high recovery” for the municipal bonds if Carousel Center files bankruptcy or if the CMBS defaults or is restructured, the analysts wrote in the report. The debt service reserve fund on the PILOT bonds stands at $31 million compared with the $24 million of payments due in 2023. 

“We would expect the PILOT payments to continue to be paid in receivership and the available liquidity in the form of a cash funded PILOT bond debt service help reduce the likelihood of payment default,” Moody’s said. 

Still, the decline in the mall’s value and the moderately increasing debt service on the PILOT bonds raises the prospect that the muni debt would be included in any broader restructuring, Moody’s said.