June 17, 2013 9:38 am

US market braced for Reits issue slowdown

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The busiest corners of US equity capital markets are bracing for a sharp slowdown as expectations of rising interest rates sweep through the market, bankers and securities lawyers have warned.

Investors are demanding higher payouts before they buy up share offerings in real estate investment trusts (Reits) and master limited partnerships (MLPs), tax advantaged structures that allow companies to distribute most income as dividends.

That is threatening issuance from the two yield-orientated sectors, which have combined for nearly a third of the $119bn in equity capital that has been raised in the US so far this year, according to Dealogic.

The sectors, favoured by investors in recent years, had been on pace to top the record $60bn in capital raised from US equity investors in 2012.

Richard Truesdell, co-head of Davis Polk & Wardwell’s global capital markets practice, said: “Reits and MLPs have been a significant driver of the IPO market but as interest rates have begun to rise, we have seen more choppiness in investors’ appetite for high-yielding equity securities.

“It’s not that near-term rates have risen that much, but when you look forward, there’s an anticipation of even higher rates making these securities less attractive to the long-term investor.”

The prospect of a collapse in issuance comes as investors brace for the latest comments from the US Federal Reserve, which is expected to withdraw or begin tapering its $85bn a month stimulus programme in the coming months.

Speculation over the precise timing of an exit has caused yields on the 10-year US Treasury bond to jump 50 basis points to 2.13 per cent from the end of April.

That move has compressed the spread between the 10-year US bond and the average dividend payout of publicly traded Reits and MLPs, pushing some investors out of the market for the equities and back into fixed-income products.

The rotation has triggered a sell-off in shares of Reits and MLPs. The $545bn market cap MSCI US Reit Index, which boasts a 3.6 per cent dividend yield, has fallen 7 per cent since May. The $231bn market cap Alerian MLP index, which yields 5.6 per cent, has lost 2.2 per cent over the same time.

Colony America Homes, one of a handful of Reits in the budding rental housing sector expected to list, postponed its float due to market conditions earlier this month. The move marked the first time a Reit delayed a US share offering since November, according to Dealogic.

Quicksilver Resources became the first MLP to postpone a share issuance since last year when it pulled its initial public offering plans last month.

“There’s no question what’s happened over the past few weeks is having a chilling impact on dividend paying stocks,” said Brian Reilly, head of US equity capital markets at Barclays. “But I think relative to fixed income investments, the sectors are still more attractive.”

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