Debt Cost Too High? Go to Europe

I have been watching some of the debt that is being sold in Europe by some top rated U.S. companies and one that just happened that really stands out is the E1.8 billion (Euro) issue which just closed from real estate giant Prologis (NYSE:PLD). Prologis is a global giant, so they borrow in markets that provide the best advantage to the company.

The company sold 3 series of notes with those due in 2027 pricing at 1/4%, the 2031 notes were 5/8% and those way out in 2049 were 1.50%. To add insult to injury the interest is paid annually.

The bonds were rated A3 by Moodys and A- by S&P.

The pricing document is here.

47 thoughts on “Debt Cost Too High? Go to Europe”

  1. Let’s just relax and give everything a year or two to see what happens. I don’t know much but I think US will cut rates sooner than later. I already bet on that. This could hurt the money market yield. They are talking up the US 100 year bond now. Maybe 1% or 2%? That NRUC and JPM-C trading around 2.2% YTW? The corresponding bonds are trading 1.8%-1.9% YTW making the NRUC “very compelling” and “most attractive” but the JPM-C maybe slightly overvalued in my opinion. The TIPs I bought last Thursday? My computer says I’m up 6.67% this morning, the coupon yield is down to around .3% now. I wish I could figure out how those darn things will work out. Thirsty mom and pop are all piling into risk now. Parched for yield. Of course all of this is insane if viewed from previous standards but we are in the brave new world now. What? Me worry?

    1. Study the implications of ‘relativity’ in psycho…logic and socio…logical (can use the suffix of “pathic” ). I got my undergrad in psych back in 1980 and that was a prime time for the rise of counseling, humanistic and self-help recognition. It was and continues to be a side study field for me. Right now I am enjoying reading about the great Milton Erickson and his work.
      The more patatable term is ‘rationalization’. Usually, others can tell when an individual or even a society has crossed these lines, but the patient can not. Oftentimes, the behaviors and patterns can be very destructive to social and family structures and can be carried on as ‘normal’ behaviors and outcomes for many generations. I think this is a very valid element of investing and not following the Socio and Psychopaths. Somewhere buried beneath the Drama are those unseen, unsung doing the right thing everyday sending waves out that keep us cohesive.

      1. Joel, now that you’ve given away your age. Just a youngster. Current situation reminds me of “how to boil a frog”. Last year I paid more in taxes than Amazon. Come on. But it makes sense to some people.

  2. The White House just announced that the Annual Bankers’ Meeting at
    Jackson Hole, WY will be moved to Mara Largo starting in 2020.

  3. Interestingly, I heard today US and Canada are the only two countries in the world with an inverted yield curve (whether talking head was referring to all countries or just industrialized I dont know as he said “in the world”). Even the negative rate countries do not have an inverted yield curve. Financial systems generally rely on a sloped curve to function properly. I suspect this will not be allowed to continue long term.

    1. James Bullard has repeatedly stated that he believes that cutting rates should be significant enough to alleviate the inverted curve so as to eliminate the issue of people thinking there will be a recession. Sounds like voodoo to me.

      1. It seems to me that changes over time regarding the Fed have lessened the impact it has and also handcuffed what they can do… I’m old enough to remember when changes in the Fed funds rate would be changed suddenly, not on a preset date, and the Fed had the flexibility to change rates in increments other than 25 basis points… Even in those days when interest rates were higher, the Fed could announce changes of 10 basis points or less, and they’d also announce the rationale might be nothing more than to move the rate to be in line with the market. Now, their intentions have to be telegraphed well in advance and every change has to have mean there must be implications for recession, international trade, whatever…. I don’t know which was better, but it sure feels as though the handcuffs, be they self-imposed or structured to satisfy analysts and economists, have lessened the potential impact of their changes, thereby lessening their power to do what they’re supposed to be able to do…. It also seems to me that ultra low interest rates possibly leads to misallocation of funds that can lead to an increasing, not decreasing, inability to influence inflation rates. Who’s next on this soapbox?

        1. Im guessing operation reverse twist would do no good by trying to dump long end bonds. Others would sop up the bonds seeking yield, and it not wind up moving them much. So the lower end may have to go lower to right size the curve.

  4. I guess this could go here or in the REIT section.. the much debated GNL REIT which has a big presence in EU has done a lot of mtge’s/refi’s/credit shuffling in the last 6mo at sub 2%.. they hedge out the currency risk.

    So even low or unrated REITs w decent r/e holdings are getting access. GNL put some of this to work still finding good rates on strong industrial properties at a weighted avg cap of 7.69%.. .. releases related to this for those interested are on 7/9 and 7/15 in the news release section of the co or on SA.

    1. Bea – thanks for posting this message, as I own a number of GNL-A preferred shares, but not the common stock. While the company is unrated, I think the preferred is a fairly safe investment at the current time. Much appreciated.

      1. sure Lou.. I have traded in and out of GNL, currently no position.. the pfd is also on my watch list it’s income seems quite safe to me as well..

        back to being on this topic of cheap EU debt, I wonder how long it will be before we see fleeing EU money buying up distressed US and CA REITs .. if someone has access to very cheap EU money, why not buy a KRG, MAC, TCO, RPT, too many CA names to mention.. they can always hedge out the currency risk and pocket a huge (in todays enviro) income stream.. even in a slowdown or recession they’d probably earn 5-6% .. sadly? I guess the commercial r/e bubble is still inflating.. all over the world.. bubbles bubbles bubbles.. Bea

  5. Well, if the Euro was down around parity with the dollar, this might be a way to get higher income if the dollar weakens in the future but the term is way too long to do that speculation.

  6. Credit card rates 0%, don’t worry – money is free for at least 10 years. The new norm, low rates FOREVER.

    Of course, I am being snide.

    We face record (1) corporate debt (2) student loan debt (3) US government deficits with no credible model showing them doing anything but increasing. Plus, Social Security and Medicare running out of money.

    I don’t accept the new norm. These rates cannot last forever. With all that said, I am essentially 66% in cash right now.

    I have no answers but I will not accept that money will earn 0% or negative rates is our new norm. We are badly broken folks

    1. Agree rates can’t stay down forever. Am slowly liquidating positions also and loading up on cash. This morning I sold off busted convertible BAC.L. Never thought I would do that but it has jumped to where yield now is less than 5% and I had over 16% gain (in IRA, no tax consequences). That’s 3+ years of dividends. I’ll sit back and wait.

      1. I did not want to sell the US preferreds, I took profit on. Right now, I am down to 10% in Canadian resets and 24% in US preferreds for the 34% that is invested. I should be selling the US preferred’s but I need some income, so if I lose that income, I will spend it anyway. So I am holding what is left. Not because I should but because going all cash is the same as a taking a loss on a pullback anyway

        1. I am sorry to hear that, Steve, especially since you need the income. I’m at the point where I only want to hold stuff that I feel okay with holding no matter what. Only the callables concern me at all, and they will all either be called (like the MTBs) or someone will offer me enough to let them go. Then I will just sit and hold the rest of my stuff & collect. If some go TU, I’ll live with it. I’m that confident in them.

          But then, I’m not even close to spending my capital. Big advantage, I think.

          Good luck…

          1. Oh, I am doing just fine overall. If I have to spend down my nest egg until social security starts in 2021 – I can do that. I could also pull the trigger on social security.

            If I were working, I’d likely be in 100% money market and muni bonds taking large profits on US preferreds. Why? The market makes no sense at all to me.

            Probably very few of us have a large enough nest egg that they can live off 2.0 – 2.5% without social security. It’s really just a choice – go to cash which guarantees, I spend down capital or take some investment risk.

            1. Steve, you sound like you got your head screwed on right. That is more important than some basis point chasing. I dont think it is wise to jump back and forth to each side of the ship as one risks making more unwise decisions. And your mindset appears determined to not do that.
              Personally Im kind of squatting down on all three sides of the income fence preferred wise… term dated, fixed perpetuals both call protected and past call (above and below par), along with a smidge of naked resets and fixed floor ones tossed in also.
              But as a general rule right or wrong (as I am just sticking with my comfort zone) I am not sacrificing quality standards as a general base rule. RPT-D is probably the most flea ridden animal I own and its a small dose. If market rerates pricing from interest rate changes so be it. But if they are bouncing around in price from credit risk, I am not predisposed to mentally handle that…
              This might make you feel a little better and your Enbridge preferreds. Compare their yields at a future 0% reset to ENBA which trades on US exchange. Look at its price…And project it out to a 0% Libor at its $27.71 current price when it resets in less than 4 years. It may make you feel better, lol. And dont let that subordinated note fool you in safety. The way a financially stressed outfit works to fend off insolvency, you would probably get a few pennies compared to nothing on a preferred. That is why they are essentially rated the same.

            2. Low rates cause those with capital to either spend less or spend down their assets which is nothing more than a hidden wealth tax. Why E Warren believes we need an overt wealth tax is beyond me as many risk averse investor/retirees have been giving up wealth, in the form of living expenses, all along. Why rub it in their face?

              As to Social Security, I believe that it is no longer the third rail of politics as an earnings test is all but assured in the next decade. The problem is nobody knows how high the stick will be held where all those that pass under it can continue to ride the train. An entire generation’s financial planning could be thrown out the window here very soon.

              1. Okay, okay, Marc. I’m not gonna be affected by any wealth tax that doesn’t touch my first $50 million. I’m not sitting under that particular tree. lol

                And the folks it does hit will likely have ways to avoid or at least mitigate it, e.g., in the Caymans. Here’s a discussion:

                https://www.vox.com/policy-and-politics/2019/1/24/18196275/elizabeth-warren-wealth-tax

                No, my wealth tax is largely my property tax, which continues to grow even while my income tax shrinks.

                And yes, SS (& Medicare, too) are in deep trouble. But I’d bet my appreciated and paid for residence that something WILL be done to shore up both of them. We old fogey baby boomers (who’ve been catered to all our lives) will demand it. Cause we damn sure vote.

                So, yes, the times, they truly are a’changin’… A lot of really wealthy people are now seriously discussing the need for a UBI. Imagine that! And Andrew Yang, a billionaire, has even reached the 2nd level of the Democratic debates running apparently on only one issue–his so-called “freedom dividend” of $1,000 per month for every adult citizen in America, including, I presume, himself. lol

                Interesting times we live in…

        2. Hate getting rid of good preferred but when capital gains are equivalent to 3-4 years of divy’s, I had to take some profits. Currently sitting about 30% cash, 35% preferred, 35% mix of common/reits/cef’s/muni bonds. Unfortunately my munis are rapidly getting called and they were a nice 5+% tax free income.

          1. AzBob–the sell decision in this market is tough. I sold some 2 year dividend capital gains this week–as long as I can get almost 2% in money market I am fine holding too much cash while waiting.

            1. I keep watching those busted converts of BAC & WFC climb and climb, but can’t hit the sell button, though I’ve flipped them profitably numerous times before.

              Somehow, this feels different and I don’t want to get trapped in sub 2% MMK yields that are likely to go down down down further if negative global yields persist and continue to push our US yields lower and lower.

              Mark Grant said something recently that has me thinking. He is putting clients into some leveraged CEFs because he thinks the Fed’s predicament will keep leverage rates from shooting up & threatening the funds.

              Does that make sense, given the current situation, or is he missing something?

              1. Camroc, in theory with low borrowing costs, leverage will increase yield. Of course if the companies run into problems this intensifies the pain trade losses, or if market tanks. So one measures their comfort level. Of course his ballast as mentioned was bar belling IG bonds. He mentioned recently par level IG bonds at 4.5% -5% and I dont know what world he is buying these from, below par and that yield.

                1. Yeah, Grant thinks the low rates will force most entities (like pension funds) to buy more and more stocks and financial assets so markets will continue up, given all the money the CBs are creating.

                  Further, he claims this scenario will continue for many years, even decades before chickens roost.

                  And if things play out according to his theory, those of us sitting with a substantial foundation of 4+% treasuries, IG bonds & pfds, might boost our overall yield considerably by adding some of those CEFs from the other end of Mark’s barbell.

                  I’m trying to find an obvious flaw in his thinking. Something I haven’t considered yet.

  7. You have a 2-way carry trade going on here. European investors are coming to the States for higher yields, while American companies are going to Europe for lower borrowing rates.

    Not exactly a stable situation.

  8. After that creepy talking guy I sold some junky stuff. I got almost all IG left now. I always own 10% SPY but no more now, thanks. I was going to sit on that cash but bought TIPs at a auction last Thursday instead. Very complicated those TIPs and don’t completely understand them but I own them now. Now today my portfolio says I’m up 5.53% on those TIPs. I’m thinking that can’t be right, can it? I don’t know because I don’t completely understand them but that’s what it says. They are IG so I’m keeping them for now anyway. Also excluding divvies that basket of IG $25 IPOs I bought earlier this year is up over 9% now so I’m pretty happy with them so far too. The highest is NRUC and JPM-C are both up about 12% so that’s pretty nice. The worst is SREA because only up 6% so just OK there. I pretty much sit on my hands these days.

  9. I am resigned to the fact that low rates are here to stay.

    Therefore, I am now trimming all of my preferreds with a negative or minimal yield-to-call, regardless of the call date or the current yield.

    Maybe we will get lucky and have another swoon like we did in December, but it seems foolish to count on one.

    1. At what YTC are you selling preferred? I have several in the 2-3% range and I think about them daily.

          1. Bob, One aspect of rate-gate that causes me pause is that while rates are dropping, risk is not. We’re accepting lower YTCs daily yet the many forms of risk other than that affected by lower rates, is a constant. Default rates have been declining in our expanding economy, though it seems a reasonable assumption reversion to the mean is inevitable.

            2%-3% does not appear enough a reward v. the longer term risk of holding many issues, though if we anticipate rates continuing to decline, we may experience additional cap gains.

            Seeing credit spreads as a potential future party spoiler, I’ve been pruning the weaker credit rated issues or those with higher debt/equity. Completely out of non-IGs and have trimmed off a few of the weaker BBB- issues.

            The “waiting for an event” cash may prove to provide superior yield LT. At least it’s a diversifier.

            1. Pretty much as I’ve done, Jerry. Cash is piling up and limited quality opportunities. Need to think on REITs some more.

  10. Tim, Given those alternatives, it seems Prologis is unlikely to soon be issuing $US debt. They will not be alone and it seems this will steepen the redemption trend.

    With zero/near zero financing available, many well thought out rate narratives may need to be rewritten, as ultra low fixed rates may leap-frog the slower index-based resets and past call issues become rare.

    As for term-dated, my average maturity date I suspect reflects near the norm at November 2023, though the non-callable bucket has full allocations.

    Seems there’s going to be a lot of cash looking for a home out there.

  11. While the credit quality for PLD is very good, 30 year taxable debt with a rate of 1.50% is horrible for us fixed income investors and probably one of the reasons I am looking at some common stocks. I wonder if PSA will pull the same stunt and try to issue debt for their European assets (Shurgard Self-Storage) and then redeem their “expensive” preferreds that are paying 5%?

    1. kap, 100% agree and also have been looking at common particularly the bond-like commons. Of course, the valuations are stretched.

      I’d have laughed at myself last year thinking paying off the 3.125% 30-year mortgage was a serious consideration. As an AAA zero-risk alternative, sure beats Prologis’ latest debt offering.

      As an aside, mortgage rates are not yet keeping pace with the recent downdraft.

      1. Alpha, I agree on the mortgage rates. They are lagging..If they would catch up, I would consider a 15 yr refi. But if they dont I may soon consider just paying it off.

        1. Yeah I have been considering paying off my two 3% car loans (about 30K total). If I can save paying 2.99% on each over the next 3 years it may be worth doing. Alternatively I can invest the money (with risk) and get 4-5% (before tax)?

        2. FYI, Grid, I sold an Omnicom 3 5/8 ‘2022 bond last week at 2.22 ytm or approx 103 5/8 which I had bot last year at 99 3/4 and used the proceeds to pay down, not pay off, my 3 3/4% mtge far enough so that I’m no longer paying the bank more in interest than I am paying myself in principal. May be simplistic, but I figured I was selling at 2.22% and reinvesting at 3 3/4% and given the mtge interest seems nearly irrelevant on my tax returns now, why keep paying the bank more than myself? Crazily, I was told that I wouldn’t qualify for a 15 year when we last refinanced even though that’s what I wanted..

          1. Dont blame you, 2WR…Mortgage underwriting processes are goofy at best. You most likely could buy me out and sell me into slavery. But have no earned income or pension and no mortgage for you! The fact you could pay it off at a moments notice is immaterial. Odd..
            A lazy retired person with a pension like me? Come on in Sir and lets sign the papers, and close the deal!

            1. Just as stupid, when we first applied for a refinance, we were told we didn’t use credit enough to qualify…. They actually told us we needed at least one more credit card before they’d refinance. Say what? So in other words I have to have more lines of unsecured borrowing before you’ll lend to me even though you can see I pay off credit cards in full every month??? Yup, they told me they had to know I can manage my debts by making sure I have a minimum number of lines of credit. Go figure….This btw from the same bank who held my original lily white mtge with no red or even pink flags in the payment history

              1. Same here, 2WR. It’s hard to get rewarded for pristine credit and reasonable spending practices. They know they can’t slam you with fees and penalties, which is where they make the ‘good money’. It’s odd to see my credit score depressed when I haven’t owed $ in over a decade to anyone, yet my wife owed almost .75mm in student loans and debt and has a better credit score than me.

      2. While I would never call a bottom, I can’t see mortgage rates going much lower given the recent activity in overall interest rates and the home sector. Maybe a little detachment from reality is deserved by the mortgage sector as the financial system doesn’t need any more inappropriately-rated residential mortgage products. I can imagine how the financial industry would love to flood the yield hungry market with 2% mortgage products.

Leave a Reply

Your email address will not be published. Required fields are marked *