“I am a value guy, and the activism model is still the best model if you can find a company with hidden value and the board is not taking advantage of it,”
“It is still the best on a risk-reward basis, but you need a lot of patience.”
- Carl Icahn
Icahn's been through the mill in recent years, famously selling out of Netflix in 2013, raking in a mere $2 billion rather than the $19 billion he'd have pocketed if he'd heldon.
Being a 'value guy', it's easy to see why he's struggled throughout this decade of high growth stocks.
However, Icahn hit the headlines in March last year when he revealed that he was massively short the commercial mortgage bond market 👇

Icahn’s short is specific to credit default swaps, or “CDS,” which are assets that back mortgages of corporate offices and shopping malls.
Icahn said the housing market bubble of 2008 has “happened all over again” due to loans made in 2012 to shopping malls and more.
“You have a bunch of mortgages ... so the banks went out and loaned money against a lot of shopping malls, office buildings, hotels and retail,” Icahn said. “It’s all credible institutions doing it again.”
This wasn't a Covid bet either.
He started placing these bets back in mid-2019...
By the middle of 2020 they started seeing gains...

Investor Carl Icahn’s bet on the downfall of brick-and-mortar retailers produced a $1.3 billion gain during the first half of 2020.
Icahn has shied away from specifying the exact size of the position, though he told Bloomberg in April, “We have billions and billions on the short side of this.”
As of July 3, traders had wagered a net $8.3 billion on the BBB- slice of CMBX 6 and an additional $2.2 billion on the junk-rated portion of the index, according to the International Swaps & Derivatives Association.
This week Bloomberg reported that a loan tied to the Prizm Outlets mall (Las Vegas) was completely written down and liquidated for just over $400,000.
Bank Of America said that the loan had a current balance of $62.2 million...
Once $11.5 million in fees and reimbursements owed to the master servicer were accounted for the total realized loss came out to $74 million.

A loan on the property with an original balance of $73 million was bundled into a commercial mortgage backed security called COMM 2012-CR4 in October 2012, one of 48 loans packaged into the multi-loan transaction known as a conduit, according to data compiled by Bloomberg.
That year, the property was valued at $125 million.
The Prizm Outlets mall was valued at $28.2 million as recently last year.
It sold for just $1.5 million at auction on Wednesday... 👇

It might be just the beginning, but is it?
And the beginning of what exactly?
“We expect mall liquidations to continue: 31 of the 39 malls in CMBX 6 are currently impaired,” said Dan McNamara, a principal at hedge fund MP Securitized Credit Partners, which has bet against CMBX 6 as part of its broader strategy.
Thanks Dan.
CMBX6 features prominently in all of the coverage, and the short bets are deliberately targeting these over-mortgaged malls, with many of the mortgages coming due in 2022...
This Wednesday Carl gave an update 👇
“The malls were way overbuilt to begin with... but additionally, the real problem was that malls and physical retail were constantly losing ground to online shopping.”
“My 'big bet' against these malls still stands. In fact, it is currently one of our largest positions. On a risk-reward basis, I believe my short bet on these malls is about as good a bet you can make in today’s dangerous markets.”
“We’ve effectively purchased billions of dollars of insurance on these mortgages by entering into credit-default swap contracts.
The CDS contracts require us to pay a small fixed amount annually to counterparties who agree basically to insure that a certain level of these mortgages get paid at par. ”
“As it becomes more and more apparent that a number of these malls and other distressed properties will not be able to pay these mortgages, the value of this insurance increases in value.”
And that's really what I wanted to highlight...
👏 This is a fantastically asymmetric trade, the absolute essence of good investing.
You could say he got lucky on the timing but I'd counter that Covid only accelerated the timeline.
The pandemic has probably saved him some premium, but that's all.
Icahn had positioned the bet and knew that many of these mortgages were coming due in 2022.
Rounding off, there is bound to be some more pain in the commercial mortgage sector, even though some mid-pandemic forecasts look a little pessimistic 👇
Either way, Icahn's targeted asymmetric bet is sitting pretty and we can expect to see more of him looking like this before it's done...

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