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.