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

Wed Dec 4, 2013 11:29pm EST

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(The following statement was released by the rating agency) SYDNEY, December 04 (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. The rating action follows Westfield's proposal on Dec. 4 to demerge its Australian and New Zealand businesses. Following the split, the international business will trade under the name Westfield Corporation (the Group). KEY RATING DRIVERS Lower Leverage: The Group's prospective proforma capital structure will be much less leveraged than at present. Fitch estimates that without the demerger Net Debt to EBITDA will fall to 6.14x by FY2015 from 6.47x in FY2012. With the demerger, Fitch estimates leverage will fall to 5.32x in FY2015. The Group's prospective leverage compares favourably to US peer Simon Property Group Inc. (Simon; A-/Stable). Fitch expects leverage to remain stable with the funding burden of the Group's current development pipeline (Group's share USD1.2bn) and proposed development projects (Group's share USD4bn) being shared via asset level joint venturing and asset recycling (non-core assets flagged for sale - USD1.2bn). Moreover the Group's overall funding costs will fall on a prospective basis, reflecting the lower debt funding costs in the US and Europe relative to Australia. Loss of Scale: The Group's loss of scale introduces an element of asset level concentration risk, but the proposed asset level diversification is considered consistent with the current rating. Under the proposed demerger, the Group will have exposure to 44 shopping centres and 5m square meters (sqm) of gross lettable area (GLA). Currently the group has exposure to 100 centres and 9.6m sqm of GLA. This compares with Simon's 325 centres and 22.5m sqm of GLA. Simon's portfolio comprises of smaller regional centres (average GLA per centre 69,000 sqm) while Westfield's portfolio comprises of major centres (average GLA 113,600 sqm) in prime locations. The demerger results in the loss of nearly half of the Group's direct property interests, which will reduce from AUD33.95bn to AUD17.64bn. More Competition: The proposed demerger will increase the Group's exposure to more competitive markets. The heightened competitive threat is offset by the prime quality and location of the Group's assets and their presence in major global city centres. The Group's exposure to the less regulated US retail market will increase from 42% to 72%. However, the Group's proven track record in securing major brands in prime locations, being sensitive to the changing nature of the local and global retail environments, as well as its ability to negotiate occupancy agreements with global brands on a worldwide basis provides the Group with significant advantages. Geographic Diversification: The proposed mix of exposures to the US and EU markets provides sufficient diversification at the current rating level. Geographic diversification differentiates the Group from its international peers such as Simon in the United States and Unibail-Rodamco SE (Unibail; A/Stable) in Europe and is seen as supportive of the Group's rating. Brand licencing prevents the group from trading under the Westfield banner in Australia and New Zealand, thereby precluding it from competing in one of its three major geographic theatres after the demerger. RATING SENSITIVITIES In the event the demerger proceeds, the following rating sensitivities will apply. Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Net Debt to EBITDA rising to greater than 6x (FY15 forecast 5.32x) on a sustained prospective basis. -Net interest cover (recurring NOI, plus management fees, minus operating costs/net interest cost) falling below 2.25x ((FY15 forecast 3.55x) on a sustained and prospective basis. Positive: Positive rating action is unlikely over the next three years while the Group executes major parts of its strategy. 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 Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 5th August 2013 is available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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 PUBLIC 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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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