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.

"wow..."

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.