Westfield Mall Owner Has Unusual Fix for Its Refinancing Dilemma

Mall landlord Unibail-Rodamco-Westfield SE is offering its hybrid bondholders a debt swap in an unusual solution to its refinancing dilemma.

(Bloomberg) — Mall landlord Unibail-Rodamco-Westfield SE is offering its hybrid bondholders a debt swap in an unusual solution to its refinancing dilemma.

The commercial real estate firm that operates the Westfield brand is offering to exchange any and all of its €1.25 billion ($1.37 billion) notes, which currently pay a coupon of 2.125%, with a new bond paying 7.25% and a cash amount.

The proposed swap comes ahead of an early redemption date for the hybrid bond later this year. Typically, companies call this type of debt at the first opportunity before selling new notes in the open market. But a jump in refinancing costs since the start of last year has made this prohibitively expensive in some cases.

“After careful evaluation of the current restrictive hybrid primary market conditions, the group has decided not to exercise its option to call the existing notes,” Unibail said in a statement on Tuesday. “Understanding the impact of this decision on fixed income investors and considering the interest of all its stakeholders, the group has decided to offer an alternative.”

The cash amount in the swap offer will not exceed €200 million, the company said. This will result in a reduction of Unibail’s overall hybrid portfolio by a maximum of 10%.

Hybrid bonds, which combine elements of equity and debt, are the first notes to take losses if a company goes under and come with risks including the possibility that the bonds won’t be called. In market convention, and in order to maintain their recognition as equity with S&P Global Ratings, companies typically replace them at their first call date.

The swap offer adds a new dimension to refinancing risk for Europe’s hybrid bond issuers. Bankers have been canvassing investors and companies about the possibility of exchanges when ordinary refinancing is too pricey. Exchanges of subordinated debt have been rare and mostly seen among banks so far.

Read more: Debt Swaps Floated as a Fix for Europe’s Hybrid Bond Havoc

Unibail’s old note had been indicated at prices of well below face value on the secondary market, indicating a high chance of the company skipping its call option. Prices for the note rose 3.6 cents to 91.3 cents on the euro after the announcement, while a separate €750 million hybrid issued by the company and callable in 2026, rose 2.2 cents to 82.7 cents on the euro.

The average price of euro-denominated hybrid bonds issued by real estate companies stands at just over half of face value, around a record low, based on data compiled by Bloomberg. Landlords have been pummeled over the past year by high interest rates, as well as a broader shift to online shopping and remote working since the coronavirus pandemic.

Earlier this month, Unibail and Brookfield Corp. were reported to be giving up the Westfield San Francisco Centre mall to lenders, adding to deepening real estate pain in a city struggling to bring back workers and tourists after the pandemic.

Today’s bond swap should attract very high participation, according to Adrien Letellier, a credit analyst and portfolio manager at Bordier & Cie. 

“The sure thing is that it creates a precedent and a new way to deal with these calls, away from the pure binary decision,” said Letellier. Still, the option may not be available to some other sector peers as the Unibail hybrid was not trading at distressed prices, he said.

(Updates throughout.)

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