daytrade diaries... january 20 part 2, page-152

Endless, I came across this, I am hoping my reits will come good, eventually!

Property Bonds Beat Corporates as Simon Sells: Credit Markets Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Gabrielle Coppola and Sapna Maheshwari

Jan. 20 (Bloomberg) -- Real estate companies are leading the rally in U.S. corporate bonds as investors increase bets that property companies will weather a rise in commercial mortgage defaults.

Bonds sold by real-estate investment trusts, shopping-mall owners and office landlords have gained 3.27 percent this month, exceeding 3.18 percent for all of the fourth quarter, and BBB rated commercial mortgage bonds returned 3.59 percent, according to Bank of America Merrill Lynch indexes. The gains are the biggest among investment-grade issuers, which returned 1.65 percent so far in 2010, the indexes show.

Simon Property Group Inc., the top U.S. mall owner, sold $2.25 billion of bonds yesterday with the coupon on its 10-year notes set at 5.65 percent, down from 10.35 percent when the Indianapolis-based company sold similar-maturity debt in March. Increasing demand signals confidence is returning to the real- estate market even before defaults peak. Fitch Ratings estimates commercial-mortgage failures may rise to 12 percent in 2012 from 4.71 percent last month.

Its a troubled sector, said Jason Brady, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees about $55 billion, including $6 billion in fixed-income assets. At the same time, its kind of getting back on its feet, he said.

Simons sale, which adds to at least $8 billion in new issues from real estate investment trusts since August, will be used to tender for $3.25 billion of existing bonds, according to a filing with the U.S. Securities and Exchange Commission. CreditSights Inc. boosted its rating on the sector last week to overweight from market weight.

Beating Agency Bonds

The Bank of America Merrill Lynch U.S. Corporates, Real Estate index rose 54 percent in 2009 after losing 28 percent in 2008. The returns this year compare with 0.75 percent for so- called agency bonds sold by mortgage financiers such as Fannie Mae and Freddie Mac, and 1.04 percent for mortgage bonds issued or guaranteed by those companies.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds globally instead of Treasuries was little changed yesterday at 1.61 percentage points. Yields rose to 4.09 percent from 4.06 percent on Jan. 18, when trading in U.S. markets was closed for a holiday.

A Treasury Department report showed international net purchases of long-term U.S. equities, notes and bonds rose to $126.8 billion in November from $19.3 billion in October.

Real Estate Spreads

Net purchases of U.S. agency debt totaled $5.9 billion in November after sales of $5.4 billion the previous month. International investors sold a net $4.6 billion of U.S. corporate debt in November after selling $844 million in October.

Spreads on real estate bonds ended yesterday at 2.6 percentage points in New York, down from 3.06 points at the end of 2009 and last years high of 12.65 points in January.

Simons sale consisted of $400 million of five-year debt, $1.25 billion of 10-year notes and $600 million of 30-year bonds, according to data compiled by Bloomberg. The spreads on the bonds ranged from 1.8 percentage points to 2.2 percentage points.

The company agreed to buy Prime Outlets Acquisition Co. last month from Lightstone Group for $2.33 billion including debt. Simon was the first U.S. REIT to return to credit markets last year after the collapse of Lehman Brothers Holdings Inc. froze access to capital and sent borrowing costs to record highs.

Lot of Comfort

Bondholders take a lot of comfort with the name, said Joel Levington, director of corporate credit for Brookfield Investment Management Inc. in New York.

Sales of bonds backed by commercial mortgages will likely remain below $15 billion as property values fall, according to analysts at Barclays Capital and JPMorgan Chase & Co. U.S. commercial real estate prices are 42.9 percent below the October 2007 peak, Moodys Investors Service data show.

Fitch said last week that the default rate for commercial property loans will rise. The number of loans of more than $100 million behind on payments totals 25, compared with four in December 2008, the ratings company said.

At the same time, investor confidence in shopping center owners may improve after the National Retail Federation, a trade group in Washington, said last week U.S. holiday sales rose 1.1 percent to $446.8 billion. Increasing sales may help property owners meet mortgage payments.

Revenue for homebuilders may rise as much as 14 percent as tax credits boost demand after sales of new houses tumbled last year to the lowest level on record, Robert Curran, a managing director at New York-based Fitch, said on a conference call yesterday.

Meantime, Evergrande Real Estate Group Ltd., Chinas third- biggest developer by market value, is marketing its first sale of bonds. China property sales jumped 76 percent to 4.4 trillion yuan ($644 billion) last year, statistics bureau figures showed yesterday.

Credit-Default Swaps

Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and is used to speculate on creditworthiness or to hedge against losses, increased 0.75 basis point from Jan. 15 to a mid-price of 84.25 basis points yesterday, according to CMA DataVision. A rise in the index signals a decline in investor confidence.

The index has climbed five straight days, the longest stretch since August, amid investor concern that corporate earnings wont meet expectations after beginning the year extremely bullish, said Mikhail Foux, a credit strategist at Citigroup Inc. The Markit index is trading at its highest level since Dec. 31, when it was 85.61 basis points, according to CMA prices.

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements.

Europes Banks

Credit swaps linked to European banks are rising on concern Citigroup Inc.s $7.6 billion loss in the fourth-quarter heralds more earnings disappointments because of increased provisions for bad loans. The Markit iTraxx Financial Index of contracts on 25 European banks and insurers climbed 4.25 basis points to 77.75, the highest in almost a month, according to JPMorgan Chase & Co. prices in London yesterday.

Citigroup, the U.S. bank thats 27 percent owned by the Treasury Department, posted the loss on costs to exit the U.S. governments bailout program. JPMorgan said last week that money set aside against losses also hurt profit.

The cost of insuring against losses on corporate bonds rose, with the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings climbing 4 basis points to 411, JPMorgan prices show.

To contact the reporters on this story: Gabrielle Coppola in New York at [email protected]; Sapna Maheshwari in New York at [email protected];

Last Updated: January 20, 2010 02:32 EST