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Destiny USA's Financial Reckoning: Bond Default Risks Loom Large


Lauren Miller

May 20, 2024 - 20:28 pm


Destiny USA's Murky Financial Future: Municipal Bonds Face Default Risks

SYRACUSE, NEW YORK — The financial horizon for Destiny USA, the largest shopping mall in New York state, appears clouded with uncertainty as Fitch Ratings signals the potential for a bond default in the future. While immediate default is not expected, concerns arise as the shopping complex grapples with a significant decrease in value and challenges within the retail sector.

In a recent evaluation, Fitch Ratings adjusted its assessment of roughly $260 million in municipal bonds, which are supported by payments-in-lieu-of-taxes, upgrading them from a precarious C level — a step above default — to a CC rating. This financial instrument was initially released as part of an expansion strategy transforming the Carousel Center mall into a prominent shopping empire. According to the ratings agency, for the foreseeable time, these obligations will be fulfilled through the mall's net-operating income.

The decline of Destiny USA's market value, which has plummeted by a staggering 81% since the year 2014, can be attributed to several factors. Key tenants of the mall, such as JC Penney and Lord & Taylor, have succumbed to bankruptcy. Moreover, the pervasive impact of the Covid-19 pandemic has expedited the transition to online shopping platforms, adding further strain to brick-and-mortar establishments like Destiny USA.

Fitch Ratings, in a release on Monday, elaborated on the ongoing struggles faced by the non-trophy mall sector, of which Destiny USA is a part. This segment of the retail market is experiencing a squeeze from tepid revenue generation coupled with climbing operational costs. Contributory factors to this trend include a retail industry grappling with reduced consumer interest, the inflationary climate, and a noticeable pivot in consumer spending habits from tangible goods to services. These variables collectively presage an increasingly challenging environment for weaker mall properties.

The Pyramid Companies, under which Destiny USA operates as a subsidiary, has witnessed fluctuating valuations of their assets. The Carousel element, which covers a part of the 2 million square foot megamall, boasts a valuation of $64 million — merely a fraction of the bond liabilities. Meanwhile, the newer expansion segment holds an appraisal of $69 million, as reported by Moody's Ratings.

Destiny USA's financial responsibilities extend beyond municipal bonds. The mall is currently servicing $430 million in debt through two mortgage-backed securities. In a measure to elongate the terms of the CMBS loan, the mall successfully hit a $16 million net-operating income threshold, paving the way for an extension until June 6, 2024. However, looming ahead is a $19 million objective for stretching the lenience period to June 6, 2025. Pyramid Companies are in active negotiations to solidify the loan's extension into the forthcoming year, as affirmed by Fitch.

The ensuing years present escalating annual goals for the CMBS loan extensions, with a rise to $22 million in 2026 and $24 million in 2027. Should Destiny USA fail to meet these ambitious milestones, the property might face the prospect of slipping into receivership.

Despite the somber outlook for the CMBS obligations, Fitch Ratings has provided a glimmer of hope, indicating that the municipal bonds, which hold seniority over the mortgage-backed securities, are likely to continue receiving payments in the short term. This assurance comes even in the face of a potential discontinuation of extensions on the CMBS front after June 6.

The Pressures of Retail Relevancy

Destiny USA's current predicament underscores the broader threats faced by many traditional retail outlets in an era where e-commerce giants continuously attract a surplus of consumers. Substantial stores, once considered the backbone of mall revenues, are now either vanishing due to insolvency or optimizing to smaller, more sustainable operations. This shifting landscape, alongside the pandemic's irreversible push towards online shopping, spells a troubling forecast for malls that have not adapted quickly enough to retain significance.

The Risks of Retail Bonds

With the spotlight on Destiny USA, there emerges a cautionary tale for investors in municipal bonds linked to retail projects. Assessing the vitality of these investments requires a nuanced understanding of current market trends, consumer behavior, and the retail industry's adaptability to technological disruptions. The once steadfast confidence in malls as revenue generators is now a relic of the past, replaced by a complex and volatile bond environment.

Pyramid's Financial Maneuvering

The Pyramid Companies, despite the market adversities, continue to explore strategies to stabilize Destiny USA's financial ship. The company's efforts to negotiate loan extensions and chase income targets to avoid stringent actions like receivership, showcases a resolution to find viable solutions in a turbulent economy. Nonetheless, the true efficacy of these maneuvers remains to be tested against the tide of an evolving retail domain.

A Landscape Changed by Covid-19

The retail industry's transformation has been massively expedited by the pandemic, a reality that properties like Destiny USA could not escape. The already-in-motion transition from physical shopping to online marketplaces was catapulted into overdrive, leaving malls rushing to catch up. This seismic shift in consumer habits and the resulting business model pivots are perhaps the most telling sign of what may lie ahead for similar retail centers.

Conclusion: A Mall's Fate in the Balance

The prolonged sustainability of Destiny USA as a shopping destination is a narrative interwoven with economic complexities, industry evolution, and consumer preferences. As Fitch's ratings predict bumpy roads ahead, the path for the mall and its stakeholders is fraught with uncertainty. Observers and investors alike await with bated breath, monitoring how the synergy of financial strategies and market developments will dictate the future of this once bustling hub.

For more details on the evolving state of Destiny USA and its financial standing, you can refer to the full news release by Fitch Ratings regarding the credit rating update and the considered factors.

Related Content: New York Mega Mall Has Muni Bond Rating Slashed Deeper Into Junk

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