REIT Credit Swaps Rally as Bernanke Fuels Boston Properties, Beazer Bonds
Credit-default swaps on real-estate investment trusts and homebuilders tumbled as the Federal Reserve pledged to buy additional Treasuries to keep interest rates low, spurring corporate bond sales that curb borrowing costs.
Contracts on Beazer Homes USA Inc. dropped 39.2 basis points to 566.5, the lowest since May, after the Atlanta-based builder sold bonds, according to data provider CMA. Swaps on Boston Properties Inc., which today issued $850 million of notes, have declined 11.7 basis points this month to 106.4, near the lowest since April, CMA data show.
“It’s a major trend in terms of debt pricing and the liquidity that the government has given us,” said Damon Andres, who helps manage more than $145 billion in assets at Delaware Investments in Philadelphia. Real estate investment trusts, in particular, “continue to amaze at lower and lower refinancing rates, plugging away and getting maturities taken care of and getting really cheap debt.”
Fed Chairman Ben S. Bernanke announced last week plans to buy an additional $600 billion of Treasuries to aid the economy after the central bank had already completed purchases of $1.7 trillion of long-term debt. That’s helped drive borrowing costs for companies to record lows and the perception of corporate creditworthiness to near the highest since April.
Real-estate bonds in the U.S. have gained 2.4 percent since Sept. 30, outpacing the broader investment-grade corporate bond market, which has gained 0.5 percent, according to Bank of America Merrill Lynch index data.
Boston Properties, the office REIT led by Mortimer Zuckerman, sold the 4.125 percent debt coming due in May 2021, according to data compiled to Bloomberg.
Swaps on BRE Properties Inc. fell 3.4 basis points to 109, the lowest since October 2007, according to CMA. The swaps have dropped 18.3 basis points since the San Francisco-based REIT sold $250 million of debt in September.
Sales of corporate bonds by REITs globally accelerated to $3.64 billion in October, the busiest month for offerings by the companies since they sold $3.72 billion in September 2009, Bloomberg data show. That compares with $593.1 million of issuance worldwide in May, Bloomberg data show.
“They’re not going to have this cheap of debt forever, but for now they’re getting bailed out of any problems,” said Andres. “It’s not that fundamentals are getting better, it’s that the debt is financing is cheap, it’s liquid, and it’s cheaper than what’s in place.”
Sales of new homes rose in September for a second month to a pace that signals the industry is struggling to overcome the effects of a jobless rate hovering near 10 percent. Swaps on Miami-based homebuilder Lennar Corp. dropped 4.1 basis points to 395.7, CMA data show. The contracts lost 75.6 basis points last week. KB Home in Los Angeles fell 2.8 basis points after a decline of 81.2 last week.
Beazer, a builder of homes for first-time buyers, sold $250 million of 9.125 percent senior notes due May 2019, Bloomberg data show. Proceeds may replenish cash used to repurchase outstanding senior notes, the company said today in a statement distributed by Business Wire.
The Markit CDX North America Investment Grade Index, a benchmark gauge for corporate credit risk investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased for the first time in six days, adding 2.2 basis points to a mid-price of 87.8 as of 5:31 p.m. in New York, according to index administrator Markit Group Ltd.
Problems in Europe
The index, which typically rises as investor confidence deteriorates and falls as it improves, ended Nov. 5 at 85.6, the lowest since April 15.
“The problems in Europe may finally be moving into the corporate space,” Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York, wrote in an e- mailed message. “The recent collapse in CDS spreads witnessed since the end of October could start to slow.”
Credit-default swaps on Ireland and its banks surged on concern the cost of bailing out the nation’s financial system is unsustainable. Swaps on Ireland rose 20.8 basis points to 598.9, CMA data show.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
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