TEXT-S&P raises Gecina ratings to 'BBB/A-2'
Overview -- French real estate company Gecina has strengthened its capital structure over the past 12 months, in our view, as a result of asset disposals and a moderate financial policy. -- We are raising our long- and short-term ratings on Gecina to 'BBB/A-2' from 'BBB-/A-3'. -- The stable outlook reflects our view that Gecina will likely maintain its moderate financial policy. Rating Action On Oct. 17, 2012, Standard & Poor's Ratings Services raised its long- and short-term corporate credit ratings on France-based real estate company Gecina to 'BBB/A-2' from 'BBB-/A-3'. The outlook is stable. Rationale The upgrade follows Gecina's strengthening of its financial risk profile through an improved capital structure and a shift in its financial policy, which we now view as moderate. We also factor in its improved liquidity. Our assessment of the financial risk profile remains "significant" and the business risk profile remains "strong," according to our criteria. The ratings reflect the company's strong market position in the French office property market. It had a high total occupancy ratio of 94.1% on June 30, 2012, and an experienced management team. Gecina is reducing its exposure to development activities and executing its strategy of focusing on large prime quality office assets located in the Paris region, which are typically more resilient in terms of market valuation. We also view favorably Gecina's slightly decreasing exposure to traditional residential properties which provide low yields while investing in demographic segments with higher returns and low risk like student housing, where it holds a leading position, and nursing homes. In our view, this strategy and Gecina's exit from the logistics segment, marked by the disposal of its remaining logistics assets in August 2012, will improve its overall occupancy and profitability. We believe the EUR1 billion of asset disposals completed or under sale agreement as of Sept. 30, 2012, should result in a stronger capital structure in the short term. We forecast a fall in the loan to value (LTV) ratio to closer to 40% by Dec. 31, 2012, from 44% on June 30, 2012. We see this level of leverage as low relative to the average LTV of the Real Estate Investment Trusts that we rate in Europe. Furthermore, we think that Gecina's lengthening of its hedging instruments (to 4.8 years with fixed rate debt) while keeping a moderate cost of debt (4.1%) is positive for the ratings. Gecina has also materially improved its financial flexibility by amplifying the amount of available undrawn corporate credit lines and resetting its covenants to levels closer to the industry average. Under our base-case scenario, we anticipate that Gecina will post relatively stable EBITDA of between EUR480 million and EUR500 million over the next 24 months, as rent contribution from new asset space deliveries should partly offset the rent loss from divestments in 2012 and pressures from the weakening Western Paris office leasing market. We forecast a ratio of EBITDA interest coverage improving to 2.4x in the next six months, and to 2.6x after 18 months, as a result of enhanced profitability, deleveraging measures, and the contained cost of debt. We believe that these improvements will allow the company to cope with extra capacity that may come onto the market in 2013 and 2014. The recent filing for bankruptcy of two Spanish investors that together hold 31% of Gecina's shares has no direct rating implications. The commercial court of Madrid will decide whether the creditors will take control of Gecina's private shareholders' stakes or not. However, we believe an eventual transfer of Gecina's 31% noncontrolling shares to a pool of banks could result in a more institutional and diluted shareholder base, which is likely to be neutral to the ratings. Liquidity The short-term rating is 'A-2'. We view Gecina's liquidity as "adequate" according to our criteria. We anticipate that liquidity sources will exceed funding needs by more than 1.2x in the next 12 months. On Sept. 30, 2012, Gecina had about EUR707 million of debt maturing within the next 12 months. In the same period, we estimate that Gecina will hold about EUR200 million of investments, based on investments realized and committed on Sept. 30, 2012. We understand that the group had EUR1.6 billion of undrawn committed lines maturing beyond a one-year period and EUR64 million of unrestricted cash and marketable securities on Sept. 30, 2012. In addition, we anticipate that FFO for the 12 months from Sept. 30, 2012, will be about EUR300 million and that EUR1 billion of asset disposals were realized and committed at that date. The positive rating action also factors in the intensive refinancing work the company has achieved over the past 12 months, resulting in larger amounts available on corporate credit lines and an average financing maturity extended to four years as of June 30, 2012, from 3.4 years in March 31, 2012. We view Gecina's continuing financing diversification as positive in an environment where bank lending has shrunk. Bonds are set to represent 34% of Gecina's debt structure by Dec. 31, 2012, versus 22% on Dec. 31, 2010. Outlook The stable outlook reflects our belief that Gecina's diversified asset portfolio and active debt management should result in stable debt protection metrics in the next 12 months, despite the uncertain economic outlook for European markets. We also believe that Gecina's debt repayment capacity should remain immune from pressures on capital values over the next 24 months. We consider an interest coverage ratio of 2.0x-2.5x and an LTV ratio below 50% as commensurate with the rating. In our view, rating upside is contingent on Gecina's ability to maintain a moderate financial policy, such as sustaining its LTV consistently at or below 45% and maintaining its interest cover ratio at the upper end of the 2.5x-3x range. We could consider lowering the ratings should the company deviate from its stated financial policy. In addition, if the company suffered from a strong deterioration of its leasing conditions, with like-for-like rental income dropping by more than 10%, this could also trigger a deterioration of credit quality, although at the moment we consider this scenario as less likely. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Upgraded To From Gecina Corporate Credit Rating BBB/Stable/A-2 BBB-/Stable/A-3 Senior Unsecured BBB BBB- Commercial Paper A-2 A-3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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