Wal-Mart Leases Are Key to New Debt

The newest deal to repackage a traditional bank loan as a public debt security is a $150 million note backed by mortgages on stores leased by Wal-Mart Stores Inc., the No. 1 retailer in the United States.

Proceeds from this transaction, which was awaiting regulatory approval on Monday, would replace bank loans with long-term, fixed-rate mortgages. Such loans used to be profitable for banks, which will find the market far more competitive when their appetite returns.

Leases Make Deal Attractive

Although it leases the stores that are being financed, Wal-Mart is not a direct party to the transaction. Without these leases, however, the deal would be far less attractive.

The financing arranged by a unit of Shearson Lehman Brothers is for a group of commercial property owners who have leased their 65 buildings to Wal-Mart retail stores.

A Cheaper Alternative to Financing

This is the first public securitization of commercial real estate in several years.

"Basically, it's [regarded as] a corporate receivable credit," said Peter Haley, vice president of Chemical Realty Co., who was one of several bankers to note that investors are hesitant to buy into real estate without some additional backing.

Wal-Mart's ability to get investment-grade ratings from Standard & Poor's Corp. without paying for a credit guarantee also suggests that the securitization route could provide the best customers with a cheaper alternative to bank financing.

Borrowers Like Long-Term Aspect

In this case, however, it was the long-term nature of the debt rather than the cost that was attractive to borrowers, who wanted to match the debt to long-term leases, said Michael J. O'Hanlon, managing director of Shearson.

"I think you'll see similar deals, but they won't be as good as Wal-Mart," he said.

The securities in effect represent the debt portion of a sale-leasback arrangement, Shearson officials said. The leases are part of the security for the mortgages, in addition to the real estate itself.

Bankers noted that the deal follows on the heels of a $500 million financing for Investcorp in which the income stream from Saks Fifth Avenue outlets was securitized.

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