Step #1: Pump the stock – Reference the upgrades, and notice they happen to occur right before a secondary offering – From ZeroHedge: Merrill Lynch In Full REIT Upgrade Mode – The Sequel. Notice that the upgrades are made despite the fact that the CRE market is in total shambles with no near to medium term improvement in sight.
Step #2: Dump the stock: Again from ZeroHedge: Bank Of America Merrill Lynch Gets Paid To Pay Itself Back In Developers Diversified.
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 BofA ML 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!
This excerpt was taken from the ZeroHedge posted linked above. What I think they missed was that the yield on the secondary was much less relevant than it appeared, since DDR was probably going to pay it in stock (that’s right, that funny stock split cum dividend thing).
Step #3: Shift the tax liabilities upon those who you dumped the stock on… The last step in this new REIT game, after dumping the unpayable debt converted into follow-on offering stock is to push the fake dividends and shift the tax liabilities of said fake dividends from the entity that generated the liability on to the investor. Normally, if the cash is not paid out, the REIT would have to pay the taxes on it. Now the REIT can keep the cash, dilute the stock by offering the pump and dump secondary, then pass the tax liability off to the guys that were suckered into buying the stuff, most likely by sell side brokers and analysts – as was exemplified by the BofA Merrill Lynch excerpts above. If you feel as if I (actually, Zerohedge since they broke the story) am being a little hard on the Merrill guys, check out what their ex-REIT analyst head had to say as soon as he left the company – More from Zerohedge: Some Totally Unexpected REIT Lack Of Love From Merrill Lynch -
go buy some soup cans and baked beaans and move into a bunker in montana. Who is telling the truth here? What good is Gold going to do us? Do i brace for economic collapse or trust that one day people will get to work, fill shops etc?One thing for sure is that bottom picking is not an exact science and who knows where it lies.
What does your post have to do with the manipulated IYR? Some day things will get better but buying a index or even defending the obvious manipulation here has nothing to do with a bottom in our economy. In reality manipulation like IYR prevents us from turning the corner Japanese sytle. This is a disgusting display of a scam and represents why the general public has such little faith in our banking system.