Blackstone Deal Cuts Swaps to 10-Month Low: Australia Credit
Blackstone Group LP (BX)’s $9.4 billion purchase of Centro Properties Group (CNP)’s U.S. malls is the latest sign that Australian real-estate investment trusts are eliminating debt from the takeover boom that started in 2005, cutting the cost of insuring against defaults to a 10-month low.
Credit-default swaps on Australia’s five biggest property companies fell to an average of 129.8 basis points after Melbourne-based Centro announced the sale on March 1, according to data compiled by Bloomberg. The extra yield offered by nine Australian-dollar REIT bonds issued before 2010 to interbank borrowing costs dropped 47 basis points, or 0.47 percentage point, over the past six months.
Companies in the S&P/ASX 200 A-REIT Index cut debt by 56 percent over the past two years after $74 billion of purchases between 2005 and 2008 drove the average default swaps cost to as high as 763 basis points in April 2009. Real-estate bonds returned 9.2 percent over the past year, the sixth-best among 32 industry groups in Bank of America Merrill Lynch’s index of Australian corporate debt.
“Centro was being rolled out as an example of the problems that still exist in the property sector,” said Scott Courtney, head of REIT research at Morningstar Australasia Pty in Sydney. “This resolution will result in increased willingness by banks to provide facilities to refinance debt, and the margins they’re charging will continue to improve.”
Commonwealth Property Office Fund (CPA) is seeking to buy back A$200 million of bonds maturing in June 2011 and sell the same amount of new five-year notes, according to an e-mailed statement today from Australia & New Zealand Banking Group Ltd., which is managing the sale with Commonwealth Bank of Australia.
Commonwealth Property, rated A- by Standard & Poor’s, is marketing the five-year securities at 165 basis points more than the swap rate, according to the statement.
Centro Properties Group said Blackstone’s purchase of the 588 U.S. malls allowed the company to agree with a majority of creditors to swap debt for its 108 Australian shopping centers, aiming to resolve a two-year restructuring effort. Centro, which had a stock market value of about A$8.5 billion in May 2007, said it will have $100 million to distribute to shareholders and other minority interests if the asset swap goes ahead.
For Blackstone, the purchase signals the world’s largest private-equity firm is betting on a recovery in U.S. commercial real estate after the subprime crisis.
The deal is another “sign the sector is slowly repairing itself,” said George Boubouras, head of investment strategy at UBS AG’s Australian wealth-management unit. “Private equity has moved into the sector in a sizeable transaction, which shows that people are buying into the sector and taking risk, and are finding value.”
Relative yields for the debt of Australian REITs declined as the Centro deal was completed.
The extra yield offered by CFS Retail Property Trust’s A$440 million of 2016 notes, the largest Australian-dollar bond outstanding among REITs, over similar-maturity government notes fell to 186 basis points on March 1, down 35 this year and the smallest gap since the debt was sold in October, according to Bloomberg data. The spread for Stockland (SGP) Group’s six-year notes due in 2015 shrank 96 basis points over the past year to 185.
“Centro being able to reduce gearing levels will be positive for the whole sector,” said Bob Sahota, head of fixed interest at Challenger Financial Services Group Ltd. in Sydney. “Banks have been taking a more aggressive view of providing financing to REITs.”
The Markit iTraxx Australia index, which tracks costs to insure 25 Australian corporate bonds from non-payment, rose five basis points to 108 this year.
Australian property companies snapped up real estate assets equal to about 10 percent of the nation’s 2005 gross domestic product in the three years to Dec. 31, 2008, led by $26 billion of U.S. purchases, according to Bloomberg data. The buying spree backfired when the financial crisis froze credit markets after Lehman Brothers Holdings Inc. collapsed in September 2008.
The nation’s biggest property firms including shopping mall owners Westfield Group, Stockland and GPT Group (GPT) have paid off borrowings, sold assets and raised about A$18 billion in capital. Australian REITs lowered their net debt to A$401.29 a share as of Dec. 31, from A$917.38 two years earlier, according to Bloomberg data.
“In the new, post-global financial crisis market, the level of leverage we’ve seen is considerably lower for REITs,” Challenger’s Sahota said. “The bigger REITs are now in a pretty good position.”
Property companies are also recovering after Australia’s biggest mining boom in a century helped it skirt the global recession.
Australian five-year government bond yields climbed 82 basis points to 5.34 percent over the past six months as the Reserve Bank of Australia carried out seven interest-rate increases between October 2009 and November 2010 to curb inflation. Yields exceed those on similar-dated Treasuries by 315 basis points, down from last year’s peak of 406 in November.
The gap between yields on Australian government bonds and inflation-indexed notes show investors expect consumer prices will rise an annual 2.92 percent for the next five years, the fastest among eight developed nations tracked by Bloomberg.
The Australian dollar climbed 11 percent in the past six months to $1.0164, touching a record $1.0256 on Dec. 31. The economy expanded for an eighth-straight quarter in the final three months of last year, accelerating to 0.7 percent growth from 0.1 percent in the third quarter, the government reported yesterday.
Westfield Group (WDC), the world’s largest shopping mall owner by assets, spun off Westfield Retail Trust (WRT) in December to increase its earnings potential and cut the parent company’s liabilities by A$4.4 billion, partly by using the proceeds from a A$2 billion capital raising to pay back money borrowed to buy stakes in malls.
Stockland, Australia’s biggest diversified property trust, is selling off its offices and industrial assets to focus on retail, residential and retirement businesses. Stockland reduced its debt to 20 percent of total assets as of Dec. 31, from 31 percent two years ago.
GPT offloaded overseas assets over the past two years as Chief Executive Officer Michael Cameron sought to turn around a company that posted a full-year loss of A$3.25 billion in 2008. Its latest sale, of U.S. senior housing assets to Health Care REIT Inc. (HCN) last month, trimmed debt to 22.5 percent of total assets, from 25 percent, a regulatory filing shows.
Moody’s Investors Service and Standard & Poor’s upgraded GPT’s ratings one notch to A3 and A- respectively in 2010.
“The fact that Centro was out there was adding to the margins that banks were finding it necessary to charge,” Morningstar’s Courtney said. “The fact that Blackstone was confident in the U.S. property market shows the market is in recovery and provides a view for those REITs that still retain assets outside Australia.”
The extra yield investors demand to own Australian corporate bonds instead of similar-maturity government debt fell 30 basis points this year to 167 basis points on March 1, Bank of America Merrill Lynch indexes show. The spread on U.S. company bonds declined 14 basis points to 152.
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