October 17, 2012 / 4:20 PM / 5 years ago

TEXT-S&P raises Gecina ratings to 'BBB/A-2'

8 Min Read

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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