NEW YORK--(BUSINESS WIRE)--The announcement by Simon Property Group, Inc. (Simon) this week that it is the first U.S. equity REIT to establish a global unsecured commercial paper (CP) note program is a credit positive in that it establishes another source of unsecured debt capital -- albeit not a committed long-term source -- for the company. This could be followed by similar announcements from other equity REITs, as Simon has been a sector capital markets leader, according to Fitch Ratings.
On Oct. 7, Simon (Fitch long-term issuer default rating of 'A' with a Stable Rating Outlook) announced that its operating partnership subsidiary, Simon Property Group, L.P. established a program through which it may issue unsecured CP notes denominated in U.S. dollars, Euros, and other currencies up to a maximum amount of $500 million or the non-U.S. equivalent. The notes will rank pari passu with all of the operating partnership's other senior unsecured indebtedness, all of which is rated 'A' by Fitch.
According to the Global Dealer Agreement that governs the CP notes, Simon Property Group, L.P. and Simon CP 2 are the issuers of the CP paper, which has a maximum term of 379 days for the U.S. notes (USCP notes) and 183 days for the Euro notes (ECP notes). Three CP dealers will each act as a dealer for the CP program.
Even before considering the CP program as it is not a committed long-term source of unsecured debt capital, Simon's liquidity coverage is adequate at 1.2x for the period July 1, 2014 to Dec. 31, 2016 pro forma for the 2024 and 2044 bond offerings and tender offers closed in September 2014.
The CP program provides a borrowing arbitrage opportunity for Simon. As of June 30, 2014, the company's $4 billion credit facility, which has an initial maturity of June 30, 2018, bears an interest rate of LIBOR plus 0.8% and an additional facility fee of 0.1%. The company's $2 billion supplemental credit facility, which has an initial maturity of June 30, 2016, bears an interest rate of LIBOR plus 0.95% and an additional facility fee of 0.15%. Conversely, current U.S. CP rates range from 0.15% (150-175 days) to 0.25% (265-275 days) and Euro CP rates range from 0.01% (three months) to 0.12% (six months).
Simon has been a leader in the U.S. REIT credit markets, notably unfreezing the REIT unsecured bond market in March 2009 with a $650 million offering of 10.35% notes due 2019. This offering led to subsequent offerings across the sector and was followed by credit spread compression across the REIT credit markets. Likewise, Simon's CP program could be followed by other similar programs for highly rated large capitalization U.S. equity REITs because others may recognize the low cost benefit of such programs. Of the EMEA property companies rated by Fitch, 47% have already utilized CP programs.
If more REITs were to establish CP programs, Fitch would view negatively a subsequent upsizing of such programs combined with a downsizing of long-term unsecured revolving credit facilities, which would reduce liquidity from long-term committed unsecured debt funding sources but nevertheless lower borrowing costs if the CP markets remain accommodative.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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