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hola Saminather - Mar 3, 2011 12:00 AM ET


Blackstone Group LP?s $9.4 billion purchase of Centro Properties Group?s U.S. malls is the latest sign that Australian real-estate investment trusts are eliminating debt from the takeover boom that started in 2005, cutting the cost of insuring against defaults to a 10-month low.

Credit-default swaps on Australia?s five biggest property companies fell to an average of 129.8 basis points after Melbourne-based Centro announced the sale on March 1, according to data compiled by Bloomberg. The extra yield offered by nine Australian-dollar REIT bonds issued before 2010 to interbank borrowing costs dropped 47 basis points, or 0.47 percentage point, over the past six months.

Companies in the S&P/ASX 200 A-REIT Index cut debt by 56 percent over the past two years after $74 billion of purchases between 2005 and 2008 drove the average default swaps cost to as high as 763 basis points in April 2009. Real-estate bonds returned 9.2 percent over the past year, the sixth-best among 32 industry groups in Bank of America Merrill Lynch?s index of Australian corporate debt.

?Centro was being rolled out as an example of the problems that still exist in the property sector,? said Scott Courtney, head of REIT research at Morningstar Australasia Pty in Sydney. ?This resolution will result in increased willingness by banks to provide facilities to refinance debt, and the margins they?re charging will continue to improve.?

Debt Asset Swap

Centro Properties Group said Blackstone?s purchase of the 588 U.S. malls allowed the company to agree with a majority of creditors to swap debt for its 108 Australian shopping centers, aiming to resolve a two-year restructuring effort. Centro, which had a stock market value of about A$8.5 billion in May 2007, said it will have $100 million to distribute to shareholders and other minority interests if the asset swap goes ahead.

For Blackstone, the purchase signals the world?s largest private-equity firm is betting on a recovery in U.S. commercial real estate after the subprime crisis.

The deal is another ?sign the sector is slowly repairing itself,? said George Boubouras, head of investment strategy at UBS AG?s Australian wealth-management unit. ?Private equity has moved into the sector in a sizeable transaction, which shows that people are buying into the sector and taking risk, and are finding value.?
Bond Reaction

Relative yields for the debt of Australian REITs declined as the Centro deal was completed.

The extra yield offered by CFS Retail Property Trust?s A$440 million of 2016 notes, the largest Australian-dollar bond outstanding among REITs, over similar-maturity government notes fell to 186 basis points on March 1, down 35 this year and the smallest gap since the debt was sold in October, according to Bloomberg data. The spread for Stockland Group?s six-year notes due in 2015 shrank 96 basis points over the past year to 190.

?Centro being able to reduce gearing levels will be positive for the whole sector,? said Bob Sahota, head of fixed interest at Challenger Financial Services Group Ltd. in Sydney. ?Banks have been taking a more aggressive view of providing financing to REITs.?

The Markit iTraxx Australia index, which tracks costs to insure 25 Australian corporate bonds from non-payment, rose five basis points to 108 this year