Property Bonds Slump Most Since ’09 on Slowdown: Credit Markets

Leon Black of Appollo Management
A group led by Leon Black’s Apollo took control of Gala in June in a debt-for-equity swap that cut the bingo chain’s borrowings to $2.9 billion from $3.9 billion. Photographer: Jonathan Alcorn/Bloomberg

Bonds sold by real-estate companies are performing the worst compared with the rest of the market since March 2009 on concern the slowing economic recovery will cause more defaults.

Yield premiums of bonds sold by real-estate investment trusts, shopping-mall owners and office landlords widened 9 basis points, or 0.09 percentage point, more than those on other debt in June, and continued to rise this month, according to Bank of America Merrill Lynch indexes. The worst performers were ProLogis, the largest warehouse developer, and Jacksonville, Florida-based trust Regency Centers Corp.

Yield spreads are expanding as reports last week showed U.S. employment fell in June for the first time this year and pending home resales dropped 30 percent in May from the previous month. Growth in Europe’s services and manufacturing industries slowed for a second month in June, London-based Markit Economics said yesterday.

“Real-estate bonds are lagging the market as the global economic recovery is weak,” said Ivan Comerma, who manages about 3 billion euros ($3.8 billion) as head of capital markets at Banc International Banca Mora in Andorra. “It’s uncertain when the property sector will start to turn a corner.”

The yield gap on real-estate bonds widened to an average of 236 basis points more than benchmark government debt as of yesterday, close to the highest spread in six months and up from 223 basis points at the end of May, Bank of America Merrill Lynch’s Global Corporates, Real Estate index shows. Corporate spreads increased 4 basis points to 197 basis points in the same period, according to the U.S. investment bank’s Global Broad Market Corporate index.

Bondholder Protection

Elsewhere in credit markets, indicators of corporate bond risk in the U.S. and Europe fell. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, declined 2.1 basis points to a mid-price of 120.65 basis points as of 12:09 p.m. in New York, according to Markit Group Ltd. That’s the biggest decline since June 25.

In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings fell 2.745 to 124.38, Markit prices show.

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Fidelity National Information Services Inc., the provider of banking and payment technology that private-equity firms including Blackstone Group LP sought to buy, plans to sell $1.2 billion of senior notes.

Repay Debt

The offering may be split between notes that mature in 2017 and debt due in 2020, according to a person familiar with the transaction who declined to be identified because terms aren’t set.

Proceeds will be used to buy back stock and repay debt used to buy Metavante Technologies Inc., Jacksonville, Florida-based Fidelity National said today in a statement distributed by Business Wire. Fidelity National may repurchase as much as $2.5 billion of its shares, it said in a separate statement.

In addition to the notes, Fidelity National is seeking a $1.4 billion term loan, which also will be used to pay for the share repurchase and debt refinancing, it said in a June 29 statement.

‘Overshoot’ Market

Real-estate investment trusts, or REITs, account for 17 percent of bonds in the Bank of America Merrill Lynch Global Corporates, Real Estate index. REITs “tend to overshoot the broader market when capital markets are volatile,” Craig Guttenplan, an analyst at CreditSights Inc., wrote in an e-mailed response to questions.

“Real-estate fundamentals may still be fragile but” spreads make them look “cheap” and provided there isn’t a double-dip recession, they should “outperform” other bonds later this year, Guttenplan, based in London, wrote yesterday.

Bond sales by REITs fell 31 percent to $4.87 billion in the second quarter from $7.07 billion in the first three months of the year, according to data compiled by Bloomberg. REITs were pummeled in 2007 and 2008 by the drop in property prices and a decline in occupancies and rents fueled by the worst economic slowdown since the Great Depression.

ProLogis Bonds

The extra yield on the 5.75 percent bonds due 2016 sold by Denver-based real-estate company ProLogis widened 102 basis points to 477 basis points in June, while the spread on the 6.75 percent 2012 notes from Regency Centers, a REIT, increased 75 basis points to 295, according to Bank of America Merrill Lynch indexes.

Real-estate debt paid higher returns than any other industry in the first half. Notes sold by property companies returned 8.2 percent in that period, almost double the 4.99 percent paid by other types of company debt, Bank of America Merrill Lynch indexes show. Property company bonds returned 1.18 percent since May 31, compared with 1.32 percent for all corporate bonds.

The rally was overdone because of the state of the economy, Mark Kiesel, global head of corporate bond portfolio management at Pacific Investment Management Co., the world’s top bond-fund manager, said in an interview last month.

Payrolls in the U.S. fell by 125,000 in June as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures in Washington showed July 2.

The drop in pending home resales was the biggest in records dating to 2001 and compared with a 14 percent decrease forecast in a Bloomberg News survey of economists.

A composite index based on a survey of euro-area purchasing managers in manufacturing and service industries fell to 56 from 56.4 in May, according to Markit Economics. The result was in line with an initial estimate published on June 23. A reading above 50 indicates expansion.

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