Jones Lang LaSalle
Vornado Debt Proposal Leads to Standoff
Dan Freed
May 8, 2006
Vornado Realty Trust, one of the largest and savviest REITs, has been pulling out all the stops in an effort to amend covenants on three of its outstanding bond issues to enable it to take on more debt. Facing stiff resistance from a slim majority of bondholders, some of the top executives at Vornado adviser JPMorgan, including Chairman Bill Harrison and Vice Chairman Jimmy Lee, picked up the phone to urge large investors to go along with the consent solicitation.
The amendments would allow Vornado to increase its leverage by some $2.5 billion, or close to 20% of the total value of its assets, according to estimates by bondholders and analysts.
Approval requires a majority of votes on each of the three bond issues in question. Initially, Vornado came up barely short and extended the deadline for the consent solicitation twice. The latest cutoff was Friday, after IDD's Thursday evening deadline, but one executive involved in the transaction was doubtful that bondholders would approve the current deal. Vornado could sweeten the terms and try again, however.
Successful or not, Vornado's consent solicitation represents what is arguably the most aggressive move to date by a REIT in pushing for more issuer-friendly terms on its bonds. Because the real estate market was in a shambles in the early 90s, restrictive covenants were commonplace in REIT bonds, even though most REITs have investment-grade ratings.
Beginning in 2002, REITs including Vornado began taking advantage of the improved real estate market by including looser covenant packages on their new bond issues. However, the easier terms did not take effect until after previous issues with tougher covenants matured. Vornado is the first REIT to try to make wholesale changes to the covenants on its existing bonds.
Raising bondholder temperatures is a feature of the deal that effectively turns it into a game of chicken. Bondholders who agree to the amendments will receive additional compensation-three eights of a point on the two longer-dated issues involved ($250 million of 4.5% notes maturing in 2009 and $200 million maturing in 2010). Those who vote against the amendments would not be compensated but would still be bound by its terms.
A group of 15-20 bondholders, many of which are insurance companies, banded together in what had (as of Thursday) been a successful effort to thwart Vornado's effort. The margin was incredibly slim, with some $5 million worth of bonds the difference between success and failure.
Bondholders of a third issue involved-$500 million of 5.625% notes maturing in 2007-approved the amendments. The short maturity of the issue made it an easy decision for them.
Some bondholders who were particularly incensed by the proposal said it flies in the face of some of the marketing tactics used in February to place Vornado's most recent bond issue-$250 million of 5.6% notes of 2011. They said the sales pitch by leads Citigroup and Banc of America was that the looser covenants contained in the new issue were of minimal importance since they would not take effect until all of the bonds with stricter covenants had matured, or not until 2010. Deutsche Bank was also a lead on the deal.
Despite all the fuss, bids on the 2011 issue softened only slightly when the consent solicitation was announced-to 84 bps over Treasuries from 81 bps over, according to an investor. And while the move certainly got the attention of credit rating agencies, it did not lead to any specific actions. "We get concerned when the covenants start disappearing completely," said Philip Kibel, an analyst at Moody's.
Other REITs are undoubtedly watching the Vornado situation closely, as the New York-based company is widely seen as an industry trendsetter. "I'd be very surprised if other REITs don't follow this example if Vornado turns out to be successful," said Tara Innes, an analyst at Fitch.
(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
Vornado Debt Proposal Leads to Standoff
Dan Freed
May 8, 2006
Vornado Realty Trust, one of the largest and savviest REITs, has been pulling out all the stops in an effort to amend covenants on three of its outstanding bond issues to enable it to take on more debt. Facing stiff resistance from a slim majority of bondholders, some of the top executives at Vornado adviser JPMorgan, including Chairman Bill Harrison and Vice Chairman Jimmy Lee, picked up the phone to urge large investors to go along with the consent solicitation.
The amendments would allow Vornado to increase its leverage by some $2.5 billion, or close to 20% of the total value of its assets, according to estimates by bondholders and analysts.
Approval requires a majority of votes on each of the three bond issues in question. Initially, Vornado came up barely short and extended the deadline for the consent solicitation twice. The latest cutoff was Friday, after IDD's Thursday evening deadline, but one executive involved in the transaction was doubtful that bondholders would approve the current deal. Vornado could sweeten the terms and try again, however.
Successful or not, Vornado's consent solicitation represents what is arguably the most aggressive move to date by a REIT in pushing for more issuer-friendly terms on its bonds. Because the real estate market was in a shambles in the early 90s, restrictive covenants were commonplace in REIT bonds, even though most REITs have investment-grade ratings.
Beginning in 2002, REITs including Vornado began taking advantage of the improved real estate market by including looser covenant packages on their new bond issues. However, the easier terms did not take effect until after previous issues with tougher covenants matured. Vornado is the first REIT to try to make wholesale changes to the covenants on its existing bonds.
Raising bondholder temperatures is a feature of the deal that effectively turns it into a game of chicken. Bondholders who agree to the amendments will receive additional compensation-three eights of a point on the two longer-dated issues involved ($250 million of 4.5% notes maturing in 2009 and $200 million maturing in 2010). Those who vote against the amendments would not be compensated but would still be bound by its terms.
A group of 15-20 bondholders, many of which are insurance companies, banded together in what had (as of Thursday) been a successful effort to thwart Vornado's effort. The margin was incredibly slim, with some $5 million worth of bonds the difference between success and failure.
Bondholders of a third issue involved-$500 million of 5.625% notes maturing in 2007-approved the amendments. The short maturity of the issue made it an easy decision for them.
Some bondholders who were particularly incensed by the proposal said it flies in the face of some of the marketing tactics used in February to place Vornado's most recent bond issue-$250 million of 5.6% notes of 2011. They said the sales pitch by leads Citigroup and Banc of America was that the looser covenants contained in the new issue were of minimal importance since they would not take effect until all of the bonds with stricter covenants had matured, or not until 2010. Deutsche Bank was also a lead on the deal.
Despite all the fuss, bids on the 2011 issue softened only slightly when the consent solicitation was announced-to 84 bps over Treasuries from 81 bps over, according to an investor. And while the move certainly got the attention of credit rating agencies, it did not lead to any specific actions. "We get concerned when the covenants start disappearing completely," said Philip Kibel, an analyst at Moody's.
Other REITs are undoubtedly watching the Vornado situation closely, as the New York-based company is widely seen as an industry trendsetter. "I'd be very surprised if other REITs don't follow this example if Vornado turns out to be successful," said Tara Innes, an analyst at Fitch.
(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
posted by Jones Lang LaSalle NJ News Blog at 10:40 AM
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