Default Swaps Punish Westfield Most Since 2009: Australia Credit

Westfield Group is being penalized in credit markets more than global peers as the world’s biggest mall operator faces weaker sales growth in the U.S. and at home.

In Australia, data released yesterday showed consumer confidence has plunged 16.9 percent in the past year, while in the U.S. an unemployment rate over 9 percent for six months will limit retail sales growth during this year’s holiday season, the National Retail Federation said this week. For Westfield, the world’s biggest mall owner, that may increase vacancies and lower what it can charge tenants in its two biggest markets.

“The retail environment in the U.S. is over-saturated, and that, combined with the lack of growth, would put pressure on Westfield,” said Justin Davey, a Sydney-based asset manager at BT Investment Management Ltd., which has about A$13 billion ($13 billion) of fixed income assets under management. While Westfield has managed to maintain near-full occupancy rates in Australia, “the concern is that problems will start to appear over a longer period of time if they don’t get the growth they need,” he said.

Credit-default swaps on Sydney-based Westfield’s debt climbed 264 basis points this half to 388 basis points on Oct. 5, the highest since May 2009 and the most expensive relative to Australia’s benchmark corporate bond-risk index in more than two years. Contracts on the 52-year-old company are more expensive than an index of global real-estate investment trusts for the first time since May 2009, Bloomberg and CMA data show.

Relative Yields

The relative yield on $1.4 billion of 5.125 percent notes expiring in 2014 issued by Westfield rose to 266.5 basis points yesterday from 132.5 basis points on Aug. 1, Royal Bank of Scotland Group Plc prices show. The spread to Treasuries on $650 million of 5.25 percent notes maturing in 2016 issued by Indianapolis-based Simon Property Group Inc. jumped to 283.6 from 132.3 in the same period, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Westfield spokeswoman Julia Clarke declined to comment on the debt market pricing.

Consumer confidence in Australia slumped to 97.20 this month from 117 a year earlier, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers taken Oct. 3-8 and released yesterday in Sydney.

“The fall in the Australian dollar had a significant impact on sentiment towards buying a major household item,” Westpac Chief Economist Bill Evans said in the report. “Global equity markets were also weak with the Australian share market falling by around 8 percent between surveys.”

Australian Dollar

The Australian dollar has declined about 8 percent versus its U.S. counterpart since peaking on July 27, and the benchmark S&P/ASX 200 index has fallen 14 percent its 2011 high on April 11. The so-called Aussie, the world’s fifth-most traded currency, advanced to $1.0184 as of 2:44 p.m. in Sydney, from $1.0159 yesterday in New York.

The Reserve Bank of Australia, at its policy meeting on Oct. 4, cited a “softer” labor market and consumers who are “more concerned about the possibility of unemployment rising,” as it kept rates unchanged at 4.75 percent for an 11th straight month.

The nation’s unemployment rate declined in September for the first time since March to 5.2 percent. Still, monthly employment growth in Australia averaged 4,600 from January through September, compared with an average of 31,422 in the first nine months of 2010.

Interest Rates

Traders are betting RBA Governor Glenn Stevens will reduce the key rate by 113 basis points over the next 12 months, down from 161 on Oct. 4, according to a Credit Suisse Group AG index based on swaps.

The 10-year bond yield climbed 15 basis points to 4.45 percent. It dropped below 4 percent on Oct. 4, the least since January 2009.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer prices will rise an average of 2.49 percent for the next five years, down from 2011’s peak of 3.14 percent on May 6.

The Markit iTraxx Australia index, the nation’s benchmark gauge of corporate bond risk, dropped 11 basis points to 196 basis points as of 11:35 a.m. in Sydney, Westpac Banking Corp. prices show. A close of 196 would be the lowest since Oct. 12 while a decline of 11 basis points would be the most since Oct. 5, according to data provider CMA.

The extra yield investors demand to hold Australian dollar-denominated corporate bonds instead of similar-maturity government debt rose to 250 basis points yesterday, the highest since August 2009, Bank of America Merrill Lynch index data show.

U.S. Malls

In the U.S., same-store sales fell 0.6 percent in the week of Oct. 8, compared with a month earlier, according to data by Johnson Redbook Research. The Conference Board Consumer Confidence Index remained essentially unchanged in September after a sharp decline in August. Vacancies at U.S. regional and super-regional malls climbed to 9.4 percent in the three months ended Sept. 30, the highest in at least a decade, Reis Inc. figures showed. Shopping centers, usually anchored by supermarkets, drugstores or discount retailers, had a net decrease in occupied space of 17,000 square feet (1,600 square meters) last quarter, compared with a net gain of 696,000 square feet a year earlier, Reis said.

The share market too is reflecting the risk perceived by debt investors. Westfield Group shares have slumped 20 percent this year, compared with a 7.3 percent drop in the S&P/ASX 200 A-REIT index. Westfield Retail Trust (WRT), which the group spun off at the end of last year to buy half ownership of its Australian and New Zealand shopping centers, has declined 0.4 percent in 2011.

Riskier Markets

The creation of the trust increased the parent company’s exposure to riskier markets including the U.S. and Europe, while offering investors seeking relatively safer options a domestic vehicle to put their capital into, the group said at the time.

Westfield also announced joint ventures to buy and develop shopping centers in Milan and Brazil in August, its first forays into new markets in 11 years, and said last month it is assessing the Toronto Port Lands site for a possible investment.

“Global growth figures have been ratcheted down just about everywhere you look,” said Stuart Cartledge, managing director of boutique fund manager Phoenix Portfolios in Melbourne. “Following the spinoff of Westfield Retail Trust, the impact of a weakening environment offshore will have a bigger impact on Westfield Group (WDC) today than it would have 12 months ago.”

To contact the reporters on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net; Sarah McDonald in Sydney at smcdonald23@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

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