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Bank Of America Merrill Lynch Gets Paid To Pay Itself Back In Developers Diversified

Tyler Durden's picture




 

REIT stocks benefited mightily from Merrill Lynch's generosity earlier in the year, when the ML REIT team issued follow on equity offerings, followed by prompt upgrades to the stock, although not necessarily in that order. The bottom line - roughly 5% in underwriter fees on almost $20 billion worth of new equity issued. And while last week's REIT massively downsized IPOs were an indication that the top for REIT stocks has come, that has not prevented Ken Lewis' firm from continuing to profit handsomely from the next shoe to drop in real estate.

Today, Developers Diversified Realty announced it was issuing $300 million in senior notes, with lead underwriter "BofA Merrill Lynch" 

The final deal terms were $300 million of 9.625% notes due March 2016, priced at 99.42% to yield 9.75%. The syndicate, primarily BofAML will pocket $5 million in underwriting fees (oddly, less than the customary 3% for a HY offering - are companies starting to demand more bang for their buck?).

And the ever crucial Use of Proceeds? Why paying back Bank of America's 2010 maturing credit facility, as if there was ever any surprise. More specifically:

We intend to use the net proceeds of this offering to repay debt, including, without limitation, one or more of:

  • Borrowings under our $1.25 billion unsecured revolving credit facility maturing June 29, 2010 (with a one-year extension at our option subject to the satisfaction or waiver of customary closing conditions); as of June 30, 2009, total borrowings under our $1.25 billion unsecured revolving credit facility aggregated $1,169.5 million with a weighted average interest rate of 1.5%;
  • Borrowings under our $75 million unsecured revolving credit facility maturing June 29, 2010 (with a one-year extension at our option subject to the satisfaction or waiver of customary closing conditions); as of June 30, 2009, there were no amounts outstanding under our $75 million unsecured revolving credit facility;
  • A portion of our 4.625% Senior Notes due August 1, 2010; as of June 30, 2009, there was approximately $260.8 million aggregate principal amount of our 4.625% Senior Notes due August 1, 2010 outstanding; and
  • A portion of our 5.000% Senior Notes due May 3, 2010; as of June 30,
    2009, there was approximately $193.6 million aggregate principal amount
    of our 5.000% Senior Notes due May 3, 2010 outstanding.

Not a bad deal: the company refinances BofA's 2010 bank facility, which has a 1.5% interest rate with a 2016 term piece of paper, paying 9.625%. Any way you look at it, it goes to show the "solid fundamentals" behind the sector, where the cost of extending a maturity is 6 times the current interest rate! Lest it be forgotten, not one asset bubble can be left to waste, even if the bubble includes over $350 billion annually in securitizations whose rolling maturities starting in 2012 are still unaccounted for. At least investors will get about 20% in current coupons before they realize just how "efficient" their capital reallocation was. We wish them well.

And speaking of getting more "bang for the buck", DDR is rated a piddling "Neutral" by BofA analyst Craig Schmidt. Very likely this BofA enriching event is just the catalyst Mr. Schmidt was expecting in order to upgrade the stock to Sliced Bread status. We will be following upgrades in the stock closely and will advise readers when (not if) the inevitable upgrade follows, with an $11 price target, predicated by more governmental and pundit vapors. After all, who cares if the company's 710 properties are emptier now than they have ever been.

 

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Mon, 09/28/2009 - 10:51 | 81404 Anonymous
Anonymous's picture

lets not forget that for the most part, almost all of BofA's REIT upgrades actually worked and made clients money. right?

this whole conspiracy theory of using proceeds of a new capital markets deal to pay down a bank line AND using the same bank to do the deal holds absolutely no water whatsoever.

Mon, 09/28/2009 - 11:09 | 81412 Tyler Durden
Tyler Durden's picture

I am pretty confident Madoff's investors thought the same month after month, until at the end, they didn't.

Mon, 09/28/2009 - 11:31 | 81429 lizzy36
lizzy36's picture

What conspiracy theory are you talking about? 

Was there a fundamental reason in the business model of the individual reits that merited an upgrade (if you see one please point it out to me)?

Since the bank is the biggest winner in these deals (underwriting fee's, trading commission and they got their money back on the reits bank line) is it not appropriate to question the methodology by which these upgrades are handed out?

And by your reasoning, as long as clients make money in the short term, there is nothing wrong with this process?

Let me guess, you work for Moody's, S&P or Fitch, right?

Mon, 09/28/2009 - 11:40 | 81440 deadhead
deadhead's picture

Was there a fundamental reason in the business model of the individual reits that merited an upgrade (if you see one please point it out to me)?

Perhaps it was Bianco's 9-18-09 report?

Mon, 09/28/2009 - 12:23 | 81490 Comrade de Chaos
Comrade de Chaos's picture

Reminds me of 1999 with all upgrades prior to IPO's and invetors making tons of cash as well.

Damn where is Eliot S & Co, when one needs him?

Wed, 09/30/2009 - 07:34 | 83512 flabuf
flabuf's picture

Spitzer is right where he should be.  He was no help in cleaning up anything and, most likely, made it more difficult for reputable financial consultants to do well for their clients.  Over disclosure Ex: prospectuses, results in nothing being read at all.

Mon, 09/28/2009 - 11:43 | 81444 JohnKing
JohnKing's picture

I'd really like to see who the "clients" are. My guess is they are pension fund managers getting nice commissons to do these deals. I can't believe any legitimate investor would be buying this junk (knowingly).

Mon, 09/28/2009 - 13:33 | 81571 Gilgamesh
Gilgamesh's picture

Sure, if the clients are traders and have already sold what they bought.  Oddly, I suspect that is not the profile of the average purchaser.

 

Those subprime derivatives issued in 06-07 worked and made clients money too, right?

Mon, 09/28/2009 - 14:04 | 81603 deadhead
deadhead's picture

Those subprime derivatives issued in 06-07 worked and made clients money too, right?

I believe we have a winner here.

Mon, 09/28/2009 - 17:42 | 81812 Hephasteus
Hephasteus's picture

And by consipiracy theory you mean systemic financial analysis?

Audit the fed=consipiracy theory the fed

Consipacy theory is just a misnomer applied to aggressive unwilling analysis of a secretive system.

Mon, 09/28/2009 - 11:41 | 81441 Assetman
Assetman's picture

It's oddly incredulous to me how investors fall into the same trap time after time.

It was only a decade ago that investors were clamoring for inital and secondary equity offerings for TMT firms that had didn't stand a chance to show earnings for several years.  Not only that, some of these deals had imbedded sales from their own "creators".  Yet many of those offerings were 10 times oversuscribed.

Fast forward to today.  Simply put, investors should question why a firm like BofA would underwrite something that would effectively take their exposure to a REIT out of the loop, while the REIT (in effect) makes a very inefficient capital allocation decision.

These deals are being done because the demand appears to be there-- not becuase the fundamentals of the business are improving.  As TD so aptly put, BofA and other underwriters are more than willing to divest themselves of this revolving facility crap with the REITS if investors want to play along.

Why anyone would follow a Craig Schmidt or any broker underwriting deals like this escape me.

Mon, 09/28/2009 - 14:21 | 81620 Mos
Mos's picture

When you're investing OPM what do you care?

Mon, 09/28/2009 - 12:27 | 81497 Comrade de Chaos
Comrade de Chaos's picture

"Why anyone would follow a Craig Schmidt or any broker underwriting deals like this escape me."

because for the WS sheepe there is a direct correlation between a conflict of interest and the annual bonus.

Mon, 09/28/2009 - 13:09 | 81542 Anonymous
Anonymous's picture

Hey 81404:

What's your time line for stating: "almost all of BofA's REIT upgrades actually worked and made clients money"? Not very long. We'll see if the fundamental bear call noted on ZH -- that too much leverage, overhang of commercial RE supply, downward pressure on vacancies, rents, etc. -- proves correct compared to your greater fool observation about "making money."

ZH rightly beats up on these banksters for the coordinated research/banking/lending shenanigans (ZH to lesser extent beats up FINRA for relaxing sensible rules on dissemination of research by lead managers for companies they do ibanking business with). ZH could do much better job beating up said banks for "tying" their investment and commercial banking business (hint, hint Tyler). In ZH's defense, there probably are too many targets for them to focus on this one (not when the Feds have punted on tying).

Tell us why "this whole conspiracy theory of using proceeds of a new capital markets deal to pay down a bank line AND using the same bank to do the deal holds absolutely no water whatsoever" -- care to mention any facts or evidence beyond greater fool equity arcana? Have a fundamental thesis to back this up? You don't -- "pretend and extend" may help the CMBS lenders and REIT investor run, but they can't hide forever....

Mon, 09/28/2009 - 13:09 | 81544 Anonymous
Anonymous's picture

Hey 81404:

What's your time line for stating: "almost all of BofA's REIT upgrades actually worked and made clients money"? Not very long. We'll see if the fundamental bear call noted on ZH -- that too much leverage, overhang of commercial RE supply, downward pressure on vacancies, rents, etc. -- proves correct compared to your greater fool observation about "making money."

ZH rightly beats up on these banksters for the coordinated research/banking/lending shenanigans (ZH to lesser extent beats up FINRA for relaxing sensible rules on dissemination of research by lead managers for companies they do ibanking business with). ZH could do much better job beating up said banks for "tying" their investment and commercial banking business (hint, hint Tyler). In ZH's defense, there probably are too many targets for them to focus on this one (not when the Feds have punted on tying).

Tell us why "this whole conspiracy theory of using proceeds of a new capital markets deal to pay down a bank line AND using the same bank to do the deal holds absolutely no water whatsoever" -- care to mention any facts or evidence beyond greater fool equity arcana? Have a fundamental thesis to back this up? You don't -- "pretend and extend" may help the CMBS lenders and REIT investor run, but they can't hide forever....

Mon, 09/28/2009 - 19:47 | 81916 Vinet (not verified)
Vinet's picture

Since the bank is the biggest winner in these deals (underwriting fee's, trading commission and they got their money back on the reits bank line) is it not appropriate to question the methodology by which these upgrades are handed out?
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.

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Mon, 09/28/2009 - 20:55 | 81983 Anonymous
Anonymous's picture

Does anyone know of sanctions against BAC in 2007? If so, can you tell me where to find information?

Do NOT follow this link or you will be banned from the site!