Fitch Affirms Westfield's IDR at 'A-'; Outlook Stable

Mon Apr 22, 2013 1:15am EDT

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(The following statement was released by the rating agency) SYDNEY, April 22 (Fitch) Fitch Ratings has affirmed Sydney-based Westfield Group's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. The Outlook of the IDR remains Stable. Westfield's financial risk profile and return on capital are expected to continue to improve over the rating horizon as a result of the efficient execution of the shopping centre group's joint venture strategy. Westfield's operating risk profile has improved over the past 12 months on the back of stronger like-for-like net operating income growth and improving fundamentals in its US portfolio. Westfield's core Australian property exposures are performing well with development capital expenditure funding to be shared with its Australian joint venture partner Westfield Retail Trust which is a standalone, listed retail property trust. Key Rating Drivers Falling share of direct property net income: Direct property net income to total net property income fell from 68% in FY2011 to 59% in FY2012. This is mitigated by the absence of leverage at the joint venture level. Direct property income is considered superior to property income from joint ventures owing to the risk of structural subordination of senior unsecured debt to debt issued by the joint venture. However, at this stage joint ventures are 100% equity funded and Westfield does not consider joint venture level funding as part of their operating model. Reduction in leverage : Westfield has reduced its leverage over the past year despite actively pursuing its buy-back program. Westfield has been able to reduce its debt to EBITDA (8.8x FY11 to 6.5x FY12) by enhancing asset returns and paying down debt. Asset returns have been enhanced by repositioning the portfolio to focus on the assets that provide Westfield with the triple pronged returns of management income, property returns and development income. Asset improvements and contracting capitalisation rates have provided Westfield with sources of cash flow to pay down debt. Stable property performance: Westfield's property portfolio is performing well with continued like-for-like Net Operating Income (NOI) growth (7% FY12) supported by improving re-leasing spreads in the US and a general recovery in global retail. The Australian retail environment remains weak but is underpinned by the relatively high quality of Westfield's assets over domestic competition. Property fundamentals also remain strong across the board with vacancy rates and capitalisation rates continuing to improve. Lower capital expenditure: Total capital expenditure to sales is expected to fall from 38% in FY12 to 33% in FY15. This reduction is due to the sharing of capital expenditure burden by joint venture property investors. Capital expenditure in FY13 is expected to increase to AUD 900m - AUD1b with completions accounting for AUD700m and Westfield's share of new starts amounting to about AUD 300m. Rating Sensitivities Future developments that may, individually or collectively, lead to negative rating action include: -Net Interest Cover (recurring NOI, plus management fees, minus operating costs/net interest cost including capitalised interest) falling below 2.25x (3.46x FY12) and/or gearing (Net Debt/EBITDA) rising above 7.5x (6.47x in FY12) on a sustained basis. This parameter beis breached under a stress scenario of zero NOI growth across all regions and the continuation of buy back with no assets sales. A material level of gearing the joint venture level (currently nil) would also lead to a reconsideration of the rating and potential negative rating action. Positive: Future developments that could lead to a positive rating action include: -Net Interest Cover increases to over 3.75x and gearing falls to below 5.5x on a sustained basis. Positive rating action is not expected in the next 18 months. Contacts: Primary Analyst Johann Kenny, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd. Level 15, 77 King Street, Sydney, NSW 2000 Secondary Analyst Nandini Vijayaraghavan Director +65 6796 7216 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, "Corporate Rating Methodology", dated 8 August 2012, are available at www.fitchratigs.com. Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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