OREANDA-NEWS. Money market funds have shown strong initial interest in Simon Property Group, Inc.'s (Simon; long-term Issuer Default Rating [IDR] of 'A') inaugural commercial paper (CP) program, showing funds' demand for high quality short-term securities at a time of constrained supply, according to Fitch Ratings. Simon's CP program is the first such program for a U.S. equity REIT. The CP is issued by Simon's subsidiaries Simon Property Group, L.P. and Simon CP 2 and rated 'F1'.

U.S. prime money funds have been increasing their investments in Simon's CP program since its launch in October 2014. According to data from Crane Data, LLC, only one money fund held \$7 million of the Simon CP as of the end of October, but by the end of December four funds managed by three different managers bought as much as \$80 million, allocating an average 0.9% of their assets to the paper.

The ramp-up in Simon's CP shows money funds' appetite for highly-rated short-term securities from non-financial issuers. Banks make up most of prime money funds' portfolio assets but are issuing much less short-term debt than in the past because of regulatory pressures. U.S. non-financial corporates like Simon provide a welcome source of new investment supply for money funds.

Still, Simon's CP program is unlikely to be a harbinger of new REIT supply. Future U.S. equity REIT CP issuances will likely be modest as only two U.S. equity REITs in Fitch's rated universe have long-term IDRs of 'A' or higher, consistent with 'F1' short-term ratings. Federal Realty Investment Trust (the third highest rated REIT) has a long-term IDR of 'A-', which would align with either 'F1' or 'F2' short-term ratings.

The market for CP rated 'F1' or 'F1+' is larger and generally more liquid than for CP rated 'F2', as many money funds and other short-term investors are restricted in how much 'F2'-rated paper they can buy. This could change as money fund reform and other regulatory changes reduce the influence of 'prime' money market funds on the short-term markets and lessen the distinction between 'F1' and 'F2' paper.

Issuance of CP by REITs will also be constrained by a business model that typically has little need for short-term funding. REITs require significantly less working capital compared to corporate peers, which reflects the predictability of their operating revenues and expenses. Rental revenues are contractual and typically long term, and thus they are materially less volatile than operating revenues of other corporate issuers. For example, retailers' cash revenues are affected by both the timing of sales and the payment method, and therefore short-term financing, including through CP, is more important to retailers' cash flow management.