Weingarten the latest to offer consent fees to its bondholders - InvestmentNews.com, By Marine Cole
Weingarten Realty Investors may think that the roller-coaster ride that credit markets took this summer never happened, and that corporate executives still have the upper hand when dealing with bond investors.
At least, that is how it seemed late last month, when the Houston-based real estate investment trust asked for looser covenants in its bond agreements.
Financial executives at REITs have been pushing for looser covenants in their bond indentures over the past year and a half, to allow room for more debt on their balance sheets. Bond investors were flexible and agreed to the changes because risk was low and the sector was performing strongly.
Now that the housing crisis is well under way and issuing debt has become more expensive, analysts thought for sure that the days of REITs' seeking more permissive covenants were over.
But Weingarten, a REIT specializing in shopping malls, turned that notion on its head by offering to pay bondholders a consent fee in exchange for their agreeing to modify covenants to allow it more room for additional debt or acquisitions, or simply to add leverage to its capital structure and so improve its shareholder returns.
If the company succeeds and obtains the consent of its bondholders, however, that will make its bonds riskier.
One REIT has already tried to make such a move in the new environment — only to run up against a serious pushback from bondholders.
In midsummer, Washington Real Estate Investment Trust of Rock-ville, Md., tried to loosen its covenants, but investors would have none of it. The company was able to change some of its covenants, but had to make concessions on other provisions.
The Weingarten offer not only surprised analysts and investors, it also raised the possibility that Weingarten could jeopardize its credit ratings, meaning it would have to ultimately pay more for funding.
"I was of the opinion that we would see a complete halt to the covenant-loosening trend," said Rob Haines, an analyst with CreditSights Inc., an independent credit-research firm. "This is a real surprise."
Steven Marks, managing director with Fitch -Ratings, echoed those thoughts.
"In this market, the timing is probably not the best for companies to be seeking these types of consents, given that there's not an overwhelming desire from bond in--vestors to give companies more leeway in terms of loosening covenants," he said.
Following the real estate crisis of the early 1990s, protections in the form of new covenants was added to the bonds issued by REITs, which are for the most part rated as investment grade. For instance, one of the typical covenants in REITs limits debt to 60% of total assets.
Other investment-grade bonds don't carry such protective provisions.
REITs such as Vornado Realty Trust, Kimco Realty Corp. and Duke Realty Corp. started to become more aggressive about changing those covenants toward the beginning of last year, as they sought to add more debt to their balance sheets. Bond investors, especially hedge funds, agreed to the riskier bonds, while insurance companies, considered more buy-and-hold-type investors, were a bit more reluctant.
But REITs took a hit this summer as credit markets tightened and real estate prices tumbled. The trusts didn't tap the unsecured bond market between July and the end of August, according to Mr. Marks, and when they started borrowing again in late August and September, their spreads were about 1 percentage point wider than before the summer.
Their stock prices also suffered and their credit default swaps, which indicate the likelihood of default, rose.
Weingarten wasn't immune to the industry's woes. Its stock price got as low as $36.34 toward the end of July, after trading above $50 in February, and it has been hovering between $40 and $45 in the past few weeks.
Its credit default swaps traded at more than 1% of the bonds' amount in August after spending the first half of the year at about 0.3% to 0.4%.
The company is now trying to push the allowed limit on its debt from 60% of total assets to 65%. It has about $1.2 billion in outstanding unsecured debt.
If bondholders agree to the changes, it will be allowed to have $4.5 billion in total debt, up from $3 billion as of June 30.
Weingarten already has one covenant that is looser than the market's standard. Unencumbered assets, which are assets not pledged as collateral, typically are capped at 150% of unsecured debt, but Weingarten has already loosened that to 100%.
"Weingarten is going to have some of the loosest financial covenants in the industry," Mr. Haines said.
"They're generally known as a conservative company, among the highest-rated. On a pro forma basis, their maximum amounts of debt just ballooned," Mr. Haines said.
"If they come close to those maximums, they'll get dropped at both agencies to mid-triple-B," he said.
That would place Weingarten only one or two notches above junk. Weingarten is now rated Baa1 by Moody's Investors Service and A- minus by Standard & Poor's. Both ratings services are in New York.
Weingarten didn't return calls seeking comment.
To be sure, Weingarten's an-nouncement didn't stun everyone.
"I'm surprised, but not shocked," said Merrie Frankel, vice president and senior credit officer covering REITs at Moody's.
Weingarten, one of the oldest REITs, has been around since the mid-1980s, which means it has owned a lot of its properties for a long time, making the book value of the properties lower than the market value. That in turn reduces the amount of debt allowed under Weingarten's covenants, since the limit is tied to stated asset values.
"A company like that gets penalized in their credit metrics," Ms. Frankel said. "I can understand why they're doing it."
She added that volatility has also gone down since this summer.
Still, Weingarten may not obtain the consent of its bondholders before this Wednesday, the deadline it set.
"The bond investor base of Weingarten is a who's who of insurance companies, which have a lot of expertise," said Sue Berliner, a REIT analyst with Bear Stearns Cos. Inc. of New York.
The REIT may also have to offer higher consent fees or make concessions on other covenants. So far, consent fees range from $1 per $1,000 of bonds due in 2008 to $6.50 per $1,000 of bonds due in 2026 and 2027.
"One of the things Weingarten bondholders may want to ask for is change of control, which is similar to what most corporates are putting in new issues," Ms. Berliner added.
