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In yet another market test for commercial real estate appetite (or the lack thereof), a few days ago, troubled retailer Saks (NYSE:SKS), using Morgan Stanley as interest (or lack thereof) solicitor, attempted to raise bonds in order to pay down its revolver (hm, expensive capital paying off cheap capital - definitely not a trend these days) and other upcoming maturities: Saks has quite a lot of them - roughly $190 million in bonds coming due by the end of 2011. The bonds would have been secured by Saks' real estate assets. The "market" took MS's call, listened politely, hung up, took 10 minutes to complete a few cycles of LMAO/ROFL, then called back and said: "Done... at 15%." (Apparently, the market was not privy to the latest release from Merrill indicating the palpable stabilization in retail commercial real estate.)

As was expected, the company turned white then balked at these "usurious" terms. Saks, which has recently gotten some short squeeze luvin' thanks to "beating" EBITDA expectations of -11mm EBITDA (well, not without a rub: a calendar shift from Q1 08 to Q2 09 had quite a dramatic, beneficial, and non-recurring impact, much the same way that the "December" calendar shift did miracles for GS and MS), was hoping the stupid market would see through this permanent secular collapse and totally buy into the temporary bear market outperformance. Alas, this "outperformance" will likely not placate Peter Schoenfeld who 2 days ago filed a rather angry proxy letter, appropriately titled: "It's time Saks' corporate governance practices enter the 21st century." It is fair to wager that raising 15% capital to pay off something that has sub 5% interest would likely not have had quite a soothing effect on Mr. Schoenfeld.

Anyway, long story short, Saks has now decided to issue a convertible offering instead: $80 million to be precise, and preliminary price talk currently is in the 7.5-8% range, with a 15-20% conversion premium. Underwriters are Morgan Stanley and the ever-shadow-luring Goldman Sachs. Of course, this means that once the issue is completed, the SKS short squeeze has to persist for another mere 21% price gain, before Schoenfeld and other shareholders get the dilution middle finger yet again. Then again, as stocks these days tend to run up anywhere between 10% and 100% in the days after a follow-on offering (in fact the bigger the dilution, the higher the run up), this could end up being the best thing for activist and other SKS investors, who at this point may be wise to wait, get the imminent SKS upgrade from some or other TARP-beneficiary, and get the hell out of dodge.

But the bottom line is that if secured debt can barely be raised at a 15% yield even in this most exuberant of rallies, then the pain for other CRE-backed issues (that are unwilling or unable to use the equity underwriting services of several quite prominent, CRE "experienced" banks) might just have their work cut out for them quite soon.

Disclosure: No SKS holdings. thank the almighty

Source: Saks Unwilling to Issue 15% CRE-Backed Notes, To Raise Convertible Instead