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Nov 27 - Fitch Ratings has placed Equity Residential's 'BBB+' Issuer Default Rating (IDR) on Rating Watch Negative. A full list of rating actions follows at the end of this press release. The rating action follows Equity Residential's (EQR) announcement on Nov. 26, 2012 that it will enter into a definitive agreement to acquire 60% of the assets and liabilities of Archstone Enterprise LP, a privately-held multifamily entity. Pro forma for the acquisition, the company's leverage and coverage metrics will be high for the current 'BBB+' IDR. Fitch expects to resolve the Rating Watch Negative some time in 2013, after the acquisition is consummated in the first quarter of 2013. The resolution will be predicated on Equity Residential's ability to execute deleveraging transactions such as equity offerings and asset sales. Resolution of the Rating Watch Negative will also be based on the Company's ability to increase its unsecured revolving credit facility commitment size and extend certain Archstone-related mortgages to reduce near-term debt maturities and improve liquidity. Pro forma for the acquisition immediately after announcement, EQR's leverage will be approximately 9.1x, up from 6.9x standalone as of Sept. 30, 2012 and 7.4x as of Dec. 31, 2011. Fitch defines leverage as net debt divided by recurring operating EBITDA. Pro forma for the acquisition immediately after the announcement, EQR's fixed-charge coverage will be in the low 2.0x's, down from 2.3x standalone for the trailing twelve months ended Sept. 30, 2012 and 2.2x for the year ended Dec. 31, 2011. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital improvements divided by interest incurred and preferred distributions. Pro forma for the acquisition immediately after the announcement, EQR's unencumbered asset coverage of unsecured debt (utilizing a stressed 7.0% capitalization rate) will be approximately 1.8x, down from 2.5x standalone as of Sept. 30, 2012. By acquisition close in early 2013, Fitch expects that the Company will have raised follow-on common equity and sold or intends to sell assets, such that leverage should trend below 8.0x during 2013, fixed-charge coverage will improve to approximately 2.5x and unencumbered asset coverage will improve to the high 2.0x area. The company has demonstrated access to myriad forms of capital, which should enable it to raise unsecured debt (acquisition bridge loan, unsecured revolving line of credit upsize and maturity extension, unsecured bank term loans) and common equity to fund the acquisition. In addition, the company owns a high-quality portfolio in primary and secondary markets, which should enable the company to dispose of assets to repay debt. Individually, each post-announcement deleveraging event ($1 billion equity offering, unencumbered asset sales to repay debt) and financing event (potential line of credit upsize and extension, entry into an unsecured bridge loan, extension of certain Archstone asset-level secured debt) should be achievable by EQR. However, in the transaction's totality there are execution risks inherent in each of these events that, if not fully achieved as expected could result in the Company's metrics sustaining at levels reflective of a rating below 'BBB+', leading to the Rating Watch Negative. Fitch calculates that EQR's liquidity, pro forma for the Archstone transaction and certain debt agreement amendments, is approximately 0.8x, which is low for the 'BBB+' IDR. Fitch defines liquidity as sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and expected capital expenditures and development). The Archstone acquisition will strengthen EQR's already-existing market presence in high barrier-to-entry coastal destination markets, where low single-family housing affordability drives multifamily demand. Fitch views this presence and increased market focus positively, as these markets also have limited buildable land and high construction costs, curtailing meaningful supply growth. Pro forma for the acquisition, EQR's top five markets will be Washington, D.C. (20% of NOI), Southern California (18%), New York Metro (15%), San Francisco Bay Area (10%) and Boston (9%). The company had demonstrated strong property-level fundamentals. EQR's same property NOI increased by 7.4% during 3Q'12 relative to 3Q'11, and Fitch anticipates that fundamentals will remain strong, though will moderate, due to modest job growth and limited new supply in EQR's markets, a declining home ownership rate and favourable demographic trends. The two-notch differential between EQR's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', dated Dec. 15, 2011 and available on Fitch's Web site at www.fitchratings.com, these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default. Removal of the Rating Watch Negative and affirmation of the IDR at 'BBB+' will be driven by the Company's ability to reduce debt via equity offerings and asset sales, and improvements in EQR's debt maturity profile by repaying, amending and extending the maturity of certain unsecured and secured debt obligations. At that stage, the 'BBB+' rating would reflect the following: --EQR's disposition of assets as currently contemplated; --Fitch's expectation of leverage sustaining below 8.0x (pro forma leverage would be approximately 9.1x immediately after the transaction announcement and 8.0x at transaction close in 1Q'13); --Fitch's expectation of fixed-charge coverage sustaining above 2.2x (pro forma coverage would be approximately 2.1x immediately after the transaction announcement and 2.3x at transaction close in 1Q'13); --Fitch's expectation of unencumbered asset coverage of unsecured debt (utilizing a stressed 7.0% capitalization rate) exceeding 2.3x (pro forma coverage would be approximately 1.8x immediately after the transaction announcement); --A liquidity coverage ratio sustaining above 1.0x (base case liquidity coverage would be 0.8x pro forma for the Archstone transaction). Fitch would expect to downgrade EQR's IDR below 'BBB+' absent the company achieving these asset sale, deleveraging and liquidity improvements six months after closing. Fitch has placed the following ratings for Equity Residential on Rating Watch Negative: Equity Residential --IDR 'BBB+'; --Preferred stock 'BBB-'. ERP Operating Limited Partnership --IDR 'BBB+'; -- Unsecured revolving credit facility 'BBB+'; --Senior unsecured notes 'BBB+'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012); --'Corporate Rating Methodology' (Aug. 8, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012); --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012); --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 15, 2011). Applicable Criteria and Related Research: Parent and Subsidiary Rating Linkage Criteria for Rating U.S. Equity REITs and REOCs Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis Recovery Ratings and Notching Criteria for Equity REITs Corporate Rating Methodology
* Europe stocks flat, world shares set for 4th month of gains
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