An Update on ProLogis’ Debt Rating
The market can be irrational at times. Today, PLD’s stock rose after Fitch lowered it’s debt rating. Last week, S&P lowered PLD’s debt rating. In response to S&P’s downgrade, ProLogis responded in part:
“We are disappointed with S&P’s decision to implement this change now and had hoped that they would give us time to execute on the steps outlined by the company to reduce debt by $2 billion by the end of 2009. Nonetheless, this downgrade has a limited impact on us,” stated Bill Sullivan, chief financial officer. “The change in rating will not affect our ability to draw on or to extend our senior credit facilities into 2010.”
Under the terms of our senior credit facilities, the borrowing margin is based on the lowest of the two highest ratings from three specified rating agencies. If that rating decreased one notch, the borrowing margin would only increase 0.125 percentage points. Furthermore, if that rating decreased two notches, the borrowing margin would increase 0.275 percentage points. The downgrade is not expected to impact the pricing of financings within the ProLogis property funds.
From PLD’s comments, we now know that, at the very least, the Senior Debt is likely to be affected by the downgrade by two credit agencies. What about the unsecured lines of credit? What about other forms of debt? I’m going to reiterate my “Ka-Ka-Poo-Poo-Pee-Pee” rating on the common stock (the lowest priority creditor in a bankruptcy scenario).
I’m continuing to hold my PLD Put options. It’s funny for me to see ”professional” analysts like Stifel Nicolaus and Company upgrade the stock because I know that there is no escape from Gambler’s Ruin for ProLogis. I don’t think they have a clue. I just hope someone holds them accountable when PLD’s common is a drillbit. It’s not a matter of IF… just a matter of WHEN?
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December 4th, 2008 at 9:01 am
The balance sheet is indicating $8 billion in net assets, while the stock doesn’t even have a $1 billion market cap. What valuation are you putting on their properties to say that this is a short at this level?
It seems to me that even with some mild inflation next year, this company would move back to well over $25. You are pricing in what probability that their assets will not recover in price before they have to default on their debt?
December 4th, 2008 at 9:35 am
Ben-
Good question - I’ll answer it vaguely and in a roundabout way.
An Asset is only an asset until it’s a liability. Is a piece of land that you have to carry vig on, but receive no income from, an asset? Just because the company paid an exhorbitant price for something it thought would generate income later does not always make it so. If nobody will buy it, what’s it worth? Effectively, it’s worth ZERO or NEGATIVE when you have to carry the loan. Who wants to take on another payment in these times?
Based on operating cash flows, the company cannot recover without hitting a home run. A home-run is unlikely in these times. Real estate and the economy are getting worse, not better. That’s all I need to know to know it’s going to “0″.
Thanks for the comment. If the company ever goes above $25 in the next 6 months, I’ll owe you a dinner. (just you, other restrictions may apply*)
Richard
December 4th, 2008 at 6:00 pm
Thanks for your reply…but you didn’t really answer my question. The company has lots of properties that can be worth many times the current stock valuation if there is a mild recovery in the economy. What evidence do you have that they are receiving no income from some assets? And what makes you think they won’t be able to renegotiate their obligations so that the company can stay solvent?The market seems to pricing in a 90% chance that the company will go under, and I think that the chance more like 50-50. You seem to be pricing in a 99+% chance of the worst possible scenario if you would short at this level. There are plenty of more leveraged, more risky companies out there. I was buying puts when PLD was above 50, but I have to say its a buy at this level.
December 4th, 2008 at 7:18 pm
Ben-
My valuation techniques are my secret sauce. If you believe their assets will be worth more than the book value, we will simply have to disagree.
PLD’s debt service is increasing and the current stable operating cash flows can’t cover that service. Unless they are able to raise cash through property sales, they will crater. You are absolutely correct that I am pricing a 99% chance of failure - it is a foregone conclusion because the math says so.
If you are interested in going long on PLD, you should look at the convertible debt. There might be a play there - possibly a very good play. I have not spent a lot of time analyzing the convertible value and I don’t know what it’s trading at today but I suspect there is a price at which I am a buyer. I am not a buyer of the common stock at ANY price.
By the way, look at the preferred stock and how it has decreased in value. Remember that preferred is higher in priority than the common. The decline should be enough of a signal to common shareholders that the common is worthless.
Richard
December 8th, 2008 at 1:38 pm
I wouldn’t ask for you to concede our disagreement at this early stage…but when the stock I told you to buy doubles in 2 trading days, I think it warrants rethinking the issue. Are you short PLD still, or did you buy puts?
December 8th, 2008 at 5:46 pm
Ben, you have to look at the B I G picture. Just because a stock goes up (in the short term) doesn’t mean the basic fundamentals have improved (for the long term).
FYI I did buy PLD puts today. Lucky for me I sold my ARE puts Friday.
December 26th, 2008 at 8:47 am
To my friend Richard…I’m sure if you thought PLD was a good short at 3…it’s an even better short at 13…I aljust sold half my shares to lock in a double on my purchase at an average of 3.50…so whatever happens next I’ll be happy. I put in my GTC order to sell my remaining 30,000 shares at 25. So if you lose the bet, not only will I be getting a dinner, I’ll be making a mil on this play. I need shorts like you to squeeze the stock higher so I can make my mil. SO short away my friend.