Westfield Bond Risk Increases to Record on U.S. Slump (Update1)
By Laura Cochrane
Dec. 11 (Bloomberg) -- The risk of Westfield Group, the world's biggest shopping center owner, defaulting on its debt rose to a record on concern the U.S. housing recession will curb retail sales and commercial property construction.
Credit-default swaps tied to the Sydney-based company, which generates almost half its sales in the U.S., more than doubled in the past two months to the highest on record, according to data compiled by Bloomberg. The annual cost to protect $10 million of Westfield bonds from default for five years has increased about $50,000 since Oct. 10, when Managing Director Steven Lowy said U.S. consumers were cutting spending.
``I expect spreads on Westfield credit-default swaps to go wider because of potential wobbles in commercial property, which is the next sector that could crack,'' said Mark Bayley, a Sydney-based director of credit and structuring at ABN Amro Holding NV.
Westfield, which may jointly run retail stores planned for New York's World Trade Center site, faces ``downside risk'' because the slowing U.S. economy has slashed consumer spending and may cut tenant rentals, Bayley said today in an interview. The U.S. will slip into a ``mild'' recession next year, Morgan Stanley said in weekly note to clients yesterday, joining Merrill Lynch & Co. in predicting a slump for the world's largest economy.
Westfield, controlled by Australian billionaire Frank Lowy, and its units have more than $14 billion in outstanding bonds and loans, of which about half is due in the next three years, Bloomberg data show. Investors are concerned a decrease in revenue and rents will reduce its ability to pay debt and crimp earnings.
Credit-default swaps tied to Westfield's bonds were unchanged today at the all-time high. The contracts rose more than 3 basis points to 87 basis points on Dec. 6, according to Citigroup Inc. prices, the highest since Bloomberg began tracking the data in June 2003.
Default Chance
The price implies an 8 percent chance Westfield will default on its debt in the next five years, according to a JPMorgan Chase & Co. valuation model used by Bloomberg. Westfield has the fourth-lowest investment grade rating of A- from Standard & Poor's.
Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a borrower's ability to repay debt. Higher prices suggest that investor confidence is deteriorating.
Each basis point on a contract protecting $10 million of debt from default for five years adds $1,000 to the annual cost. A basis point is 0.01 percentage point.
U.S. retail sales fell 4.4 percent in the week to Dec. 1 from a year earlier and shopper visits to stores dropped 4.7 percent as consumers struggle with the worst housing slump since at least 1991. The subprime mortgage market collapse drove up funding costs for companies as investors, concerned about losses tied to U.S. home loan securities, shunned all but the safest borrowers.
`More Spread Widening'
``Westfield has a large amount of debt so the higher cost of funding affects them,'' said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney. ``There is still bearish sentiment and the worst is not over, so with more volatility there is more spread widening to come.''
Julia Clarke, a spokeswoman for Westfield in Sydney, declined to comment for the story.
Westfield manages about A$62 billion ($55 billion) of retail centers globally and has malls in 13 U.S. states including California, Florida and Nebraska. The centers, such as the 1- million-square-foot Galleria at Roseville in Placer County, California, generate about 46 percent of Westfield's revenue.
London Mall
Westfield has more than A$14 billion of projects planned or under construction, including its 1 billion pound ($2 billion) share in the development of White City, London's biggest shopping mall, as of June 30.
Peter Lowy, brother of Steven Lowy and also a managing director of the company, may sell more stakes in some of the company's 119 malls worldwide after using six such deals this year to help reduce debt costs.
Westfield's first-half profit rose 7.4 percent to A$844 million in the six months ended June 30. The company, which ran the retail complex beneath the World Trade Center for six weeks before the Sept. 11, 2001, terrorist attacks, paid 140 million pounds in June to gain control of housing and retail development in east London that includes part of the 2012 Olympic park.
To contact the reporter on this story: Laura Cochrane in Melbourne at [email protected] .
Last Updated: December 10, 2007 23:50 EST
ASX Price at posting:
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