NEW YORK, Feb 18 (Reuters) - Simon Property Group'sbonds have weakened on its bid to buy General Growth Properties assets out of bankruptcy, and the company may face ratings downgrades and further debt deterioration depending on the success and final ownership details of its bid.
Simon Property earlier this month offered to pay $7 billion to pay off General Growth'screditors and give nearly $3 billion to shareholders in a deal that would combine the two largest U.S. shopping mall owners. For details, see [ID:nN16210579]
Standard & Poor's said it may cut Simon Property on the deal while Moody's Investors Service placed the company under review with "direction uncertain," citing potential deterioration in the company's credit profile.
Simon Property has a history of successfully incorporating acquisitions and General Growth has a number of assets that would further enhance its already-diverse portfolio, analysts said.
There are risks to the company's ratings and debt, however, depending on the company's ultimate level of ownership, and the mix of cash and stock in any deal, they said.
"The biggest driver of Simon Property's remaining liquidity position after a deal is its ownership level," CreditSights analysts Craig Guttenplan and Rob Haines said in a report.
"Even a 50/50 joint venture arrangement would drain Simon Property's entire $4.0 billion cash balance and require a drawdown on its credit facility absent a capital markets transaction which we believe would have a negative impact on the company's ratings and spreads," they said.
Simon Property said it plans to finance the deal with cash on hand, existing credit facilities and by bringing in institutional investors for joint ventures on some of the properties.
Sources told Reuters last week that the company is in very early stage talks with Blackstoneabout participating in the bid.
CreditSights said it views a deal in which the company takes an ownership stake of between 30 and 50 percent of the firm as most likely if an offer is accepted, "given Simon Property's conservative approach to financing and its dedication to high ratings."
Simon Property's bonds have weakened on risks from the proposed deal, however, while the cost to insure its debt with credit default swaps has risen.
The cost of insuring the company's bonds for five years has increased to around 156.5 basis points, or $156,500 per year to insure $10 million in debt, from 147 basis points on Feb. 15, before Simon Property announced its bid, according to Markit Intraday.
Simon Property's 6.75 percent bond due 2014 has widened to 170 basis points over comparable U.S. Treasuries, from 162 basis points before the announcement, according to MarketAxess.
S&P said it may cut Simon Property's corporate credit rating and unsecured debt from A-minus, the seventh highest investment grade, saying the size of the acquisition could weaken its credit profile if the company assumes debt.
The rating agency also warned it may cut the company's unsecured debt to one step below its corporate credit rating if unsecured net operating income falls below S&P's 50 percent threshold.
Moody's also said that it may cut Simon Property's debt by one notch if a transaction worsens the company's long-term financial profile or if the company takes on secured debt of more than 35 percent of its gross book assets.
The rating, on the other hand, may be confirmed if Simon can mitigate high debt taken on to fund a transaction and maintain solid operating performance.
Moody's rates the company A3, also the seventh highest investment grade.
(Editing by Chizu Nomiyama)
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