A financial blogger going by the overused name of Tyler Durden points to some fishy behavior on the part of banks promoting a new stock offering by troubled Weingarten Realty. Writes the reader who alerted Swamplot to the story:
This may be a bit too finance-y for you, but apparently a recent Weingarten equity offering is being used to pay down debt to banks, which the author of this post (and me) find a bit suspicious. Further shenanigans? Analyst recommendations changing for the better just before the tender.
Is this too finance-y for Swamplot? Let’s find out!
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Writing in his blog, Zero Hedge, Durden asks
If these companies are such great and worthwhile investment prospects, why are banks rushing to offload their credit exposure, which by the way is the least risky part of the capital structure, while investors are buying equity to pay down the banks credit exposure, and taking on the first-loss risk in the balance sheet? The use of proceeds in every single REIT follow-on offering has been to pay back the banks that have underwritten it. Is it that complicated to see this for the bait-and-switch it is?
Durden notes that an analyst for Wachovia Bank — now a part of Wells Fargo — upgraded earnings estimates for Weingarten and changed his recommendation on the company to “market perform” on April 15th, two months after having downgraded the REIT to a “sell.” The very next day, Wachovia became one of the underwriters of a new Weingarten stock offering — the proceeds of which are to be used to reduce the bank’s credit exposure to the company.
Durden wonders how Wachovia’s compliance department could have missed this rather apparent conflict of interest:
The first rule for any sell-side analyst is do not publish research reports that could get you in hot water with the regulators. Wachovia squarely broke that rule. The only logical (and legal) explanation is if the WRI offering was put together so haphazardly and hurriedly, that the bank really had no idea it would be an underwriter until the day of the offering and thus did not even give [the Wachovia/Wells Fargo analyst] the change to get restricted.
Merrill Lynch was another underwriter, but that company’s analyst hasn’t yet issued a new recommendation for Weingarten; Durden expects that to come out in a few days. Meanwhile, Durden suggests the Wachovia analyst’s report will
inevitably cause serious headaches for all parties involved, especially if WRI stock proceeds to crash over the next several days and the class action lawsuits start trickling in.
Even better: On April 17th, the day after the stock offering was issued, Weingarten’s management reported its own earnings estimate, which happens to be 20 percent lower than the one made by Wachovia’s analyst.
- Open Letter To The SEC Regarding Wall Street’s REIT Bait-And-Switch [Zero Hedge; shorter version at Naked Capitalism]
- And What About the River Oaks Shopping Center? [Swamplot]
It’s not too finance-y. Especially with such a large REIT as the subject.
It really is either an idiot who pushed the report out and didn’t know what they were doing, or an intentionally criminal act by the person (and institution) that pushed the report out.
For Weingarten to push out more stock offering to raise capital to pay off debt isn’t a bad thing, but the sequence of events suggest something fishy.
This is a big OOPS! NASD and/or SEC might take interest and that is never pleasant. It’s like the IRS on steroids.
I think the reason it looks suspicious is that the equity offering that Wachovia (and others) is underwriting will be used to repay debt to Wachovia. As the blogger wrote, if Weingarten is a good investment for an equity investor, then shouldn’t they also be a good borrower for a lender like Wachovia? After all, that’s how Wachovia makes money–collecting interest payments. To put it another way, if Wachovia is worried that Weingartens can’t pay back its loan through cash from operations or through refinancing, then why should I (as an equity investor) want to long these shares? OK, nothing illegal here, except maybe (probably?) for the analyst upgrade.
That said, this whole offering and the purpose for it should be a much brighter signal to potential Weingarten investors than any analyst report. It says that Wachovia thinks Weingarten is risky and Wachovia wants you, Mr. Investor, to bear 100% of that risk instead of us.
There is a period of time that they are supposed to remain silent (I think) and it is more than one day. I am thinking 30-60 days. I could be wrong, it has been awhile since I left securities company I worked for.
Thanks for putting this article on the site. It’s not too finance-y at all, and provides insight as to how business really works, unfortunately. Caveat Emptor
It is sad that analysts, companies, and even our US treasury secretary all seem to be trying to prop up stock values. Unfortunately, it will not be prosecuted in the current environment.
Not too finance-y. This is what I like about Swamplot, a little bit of everything!
The very next day, Wachovia became one of the underwriters of a new Weingarten stock offering — the proceeds of which are to be used to reduce the bank’s credit exposure to the company.
Sounds like Phil Gramm joined the board of Wells Fargo.
Sounds like Andy Fastow joined the board of Weingarten.
It is not too finance-y. Swamplot is about real estate. Commercial real estate is finance. If Moodys can rate sub prime based bonds as AAA paper, simply to get more business ( without any consequence ), then Wachovia can play games too. We need real regulation that is effective at protecting investors; not the window dressing, keep the lawyers busy, kind we currently have.
This looks to be too finance-y for kjb. Good thing he has his civil engineering job to fall back on. Raise “capital” to pay off debt? Really? Is that what they teach you at Louisiana Tech! Ha! Nice try. Why dont you take an economics class before you spout off (but I read atlas shrugged!)
Now go design me a storm drain, son. Next.
Weingarten can go to hell. A den of thieves.
Nate, if people are stupid enough to buy the stock blindly after this information comes out, so be it.
“Nate, if people are stupid enough to buy the stock blindly after this information comes out, so be it.”
Despite the lax, selective enforcement of securities laws the past few years, we fortunately don’t operate under a system of caveat emptor. That’s why we have an SEC, and why companies have to put all those “forward looking” statements in official communications.
That said, you are right. This kind of information, made public by a blogger, is important. I would say not only should people not purchase the stock, but people holding these shares should think about selling. Wachovia (Wells Fargo), Merrill Lynch (BofA) and other underwriters apparently have little faith in the company, so why should anyone else?
In case anyone needs clarification here, issuing equity to pay down debt, invest in operations, pay a dividend to existing owners, or event to literally throw down a drain, etc., is completely legal. Where does a conflict of interest occur in Wachovia gets investment banking fees for underwriting a public stock offering while the lending side of the business has a loan outstanding with the same company? Good for Wachovia for landing both deals. The only motivation Wachovia has is to price the offering “well” so that it may collect interest and repayment of principal for its outstanding loan.
Just to clarify further, the research analyst who upgraded the shares is not part of the process to prepare an equity offering. Investment banks operate with a “Chinese wall” between research and corporate finance (which handles the equity issuance), so it is unlikely that the analyst was “brought over the wall” until the day the deal was announced; thus by law he had no knowledge that a deal was imminent. Also, having Wachovia as a lender and an underwriter is very common practice. Companies often reward banks in their credit facilities by including them in equity and subordinated debt issuances. This is not out of the norm in any way.
Furthermore, issuing equity to pay down debt is common practice. In fact, for small cap growth companies, it is rare that they ever pay down debt with free cash flow; they almost always issue new equity to reduce bank debt. Granted Weingarten doesn’t fit the small cap bill, issuing equity to pay down debt is de rigeur.
Sorry to clutter this space with corporate finance, but I thought it could use some clarification.