If I manage a Real Estate portfolio with approximately 400 million in debt, which is roughly 50% Loan-to-Value (the properties are worth about 800 million). Is it possible to synthesize a bond position to effectively pay down the debt? Due to prepayment penalties, actually paying down the debt is not an option. If I recall correctly from my "finance I learned but never applied in the real world", my position as a borrower can be described as:
-X = -S - P + C (as a borrower we are paying interest, so I would have to be short the bond position. This can be synthesized by shorting stock, writing a European Put Option maturing when the loan matures, and purchasing a European Call Option maturing when the loan matures).
To offset these, we would effectively have to become a lender/receive interest, which would re-arrange to:
X = S + P - C (long stock position, going long a European Put Option maturing when the loan matures, and writing a European Call Option maturing when the loan matures).
In the real world, I've only ever entered into contracts for interest rate swaps, so what I'm wondering is:
1) Is this actually achievable/how it works? How would you go about actually executing the transaction?
2) If 1 is true, is this efficient? Is there a better way to go about this?
3) What would the "Stock" be in this scenario? If the loan is fixed with a spread over the UST (for example 130bps over a 5-yr UST that is 200bps for a rate of 3.30%), would the "stock" be the 5-yr UST?