Friday, March 20, 2009

Simon Property: No coupon is worth this

So most mornings I come into my office about 7:15. We bond people need to get up early you know. Anyway, first thing I do is fire up my Bloomberg and check my messages. The New York traders are all in even earlier than me, so usually I already have a fairly long list.

The early messages are mostly corporate bond runs, that is where various traders estimate where the bid and ask is for certain large issue corporate bonds. Around 8AM, I start getting announcements of new corporate bond issues.

This morning there was an unusually early message indicating a new issue announcement. And it was a dozy. Simon Property Group. Now admittedly, SPG is clearly a market leader among REITs, but still, its a REIT. In this market, from a bond holder's perspective, no sector is more dicey than REITs. Even banks you can point to substantial government support. With REITs there isn't likely to be any safety net at all.

Now I hadn't yet heard about SPG's simultaneous equity offering, but regardless. I replied to the salesman with the following loquacious e-mail.


I mean, activity in corporate bonds has improved from where we were in October to be sure, but Simon Property? Most of the recent corporate bond issues have been very high quality, or at least in less cyclical industries.

So I'm thinking to myself, what the hell kind of level does Simon have to pay to do a $500 million 10-year unsecured bond issue? 11% is what I was told.

Corporate bond traders talk about something called the "new issue concession." This is the differential between existing bond levels and the level at which a new deal needs to be priced. For example, Sysco (the foods company) 5.25% due in 2018 was trading at a spread of 220bps on March 12. On that day Sysco announced a new 10-year deal at a spread of 260bps. So the new issue concession was 40bps.

The new issue concession exists because you need to pay investors some extra yield to get them to care. You'd think a company like Sysco (rated A1/A+) would have a relatively light new issue concession. Its not a terribly cyclical business, good rating, not a big issuer so accounts would have room to add the name, etc.

Now a name like Simon Property would seem to be the opposite to me. Should require a gigantic new issue concession. The people who want to bet on REITs probably already own enough of the name, so you'd need to put such a large yield on the new issue to attract non-REIT buyers. Before today SPG 6.125% 5/18 traded in the 9.7-9.9% yield area in recent days. At 11%, that was a little more than 100bps of new issue concession. I thought that wouldn't be enough. At least I figured this is going to take a bit of work on the sales force's part to get these bonds done.

Turns out I was wrong. I got the message about the deal at 7:30 AM. By 8AM the deal was subject, meaning they weren't going to take any more orders. SPG even upsized the deal to $650 million and lowered the coupon to 10.35%. So ultimatelty the new issue concession was something like 50bps. About the same as Sysco!

Now this becomes a bond to watch. If it trades stronger from there it could entice other relatively high quality REIT names to come to market, which would simultaneously calm REIT stocks. If it trades weaker, it will be all that harder for other REITs to refinance their debts, with obvious consequences.


Unknown said...

not a corporate bond salesman here by any stretch of the imagination and only a general rate strategist for an independent ... been reading your stuff for quite awhile and is always good stuff ... saw the following in todays (sat) WSJ and thought it relates to Simon, and am sure you are well aware of it ... anyways, in that it is relevant, i think:

Citi Moves to Foreclose on Mall (here's link: )

-General Growth faces a foreclosure action on a New Orleans property. The debt-laden mall owner could see other lenders demand payment.

Curious to see how the 'group' acts and if in fact this is not news to those of you who travel in this space ...

Keep on keepin on and FYI, 7:15am is on the late side - personally, have the good fortune of 'covering' lots of European counterparts (CBs and prop desks) and am in by 415am ... so i'm jealous about all that sleep !! :)


In Debt We Trust said...

CMBX AAA basis pt spread is ticking lower but BBB is barely budging. Since you trade these things what are your thoughts?

Unknown said...

AI, can you give us the CUSIP number on that SPG issue, so that we small guys without Bloombergs can track it on

Unknown said...

Cusip = 828807CA3

Darth Toll said...

A funny thing happened on the way to Ben's monetization party:

What's wrong? Why didn't yields go lower for more than a day? A: because the bond market told Ben, "Sold to You!" Careful what you wish for AI, you just might get it.

KD adequately sums up my attitude about monetization of the long end:

"If the bond market sells into Ben's bid for the long end then rates will immediately start to climb once Ben finishes performing his "operations".

This will force him to do it again, and again, and again, until he owns ALL of the long Treasuries."

IMHO, that was a fatal mistake that Ben just made and will likely wreck what's left of the economy and bring about GD2 by a repeat of the 1931-32 bond market collapse.

Don Pagach said...
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