November 13, 2012 / 4:10 PM / in 5 years

TEXT - S&P revises Confinimmo outlook to negative

Overview
     -- We believe Belgium-based property investment company Cofinimmo has put 
a fairly modest level of equity support behind its strategy of portfolio 
transformation, which leaves it exposed to the timing and terms of asset 
disposals.
     -- The operating performance of Cofinimmo's core assets remains stable, 
but we are concerned about downside risks from the company's acquisitive 
financial policy.
     -- We are therefore revising the outlook on Cofinimmo to negative from 
stable and affirming our 'BBB/A-2' long- and short-term ratings. 
     -- The negative outlook reflects risks of higher leverage from an active 
disposal and acquisition program.

Rating Action
On Nov. 13, 2012, Standard & Poor's Ratings Services revised its outlook on 
Belgium-based property investment company Cofinimmo S.A./N.V. to negative from 
stable.
At the same time we affirmed our 'BBB/A-2' long and short-term corporate 
credit ratings on the company.

Rationale
The outlook revision reflects our projections that Cofinimmo's capital 
structure is likely to be more leveraged over the next 12 months than we 
consider consistent with a 'BBB' rating. 

We view our adjusted loan-to-value and debt-to-EBITDA ratios of 57% and 
11.8%for Cofinimmo on June 30, 2012, as high for the rating. The level is 
higher than we forecast because Cofinimmo did not compensate for acquisitions 
it made in the first nine months of 2012 by making timely asset disposals. 
That said, Cofinimmo has an established track record of selling assets and 
might successfully deliver on its disposal targets over the next 12 months. We 
believe the company's strategy of portfolio transformation, although gradually 
achieving a lower-risk operating profile for its income-generating property 
portfolio-around EUR59 million invested in healthcare assets this year so 
far--has so far been backed with only modest levels of equity support. Our 
calculation of Cofinimmo's debt protection metrics includes EUR52 million in 
mandatory convertible bonds issued in December 2011, which we view as 
debt-like instruments under our criteria (see "Hybrid Capital Handbook: 
September 2008 Edition," published on Sept. 15, 2008), and 50% of the 
preferred shares until they convert to common.

We acknowledge that there is a seasonal peak in Belgian real estate investment 
trusts' (REIT) debt requirements in June owing to the large dividend payment 
in May, and that timing factors contributed to the past three quarters' weaker 
debt metrics. We also understand that Cofinimmo's use of equity measures such 
as the option of paying dividends in shares and the continuous sale of 
treasury shares will likely lead to a decrease of our loan-to-value ratio to 
approximately 55% by Dec. 31, 2012. However, we believe that these 
deleveraging measures are still exposed to equity market conditions over the 
next 12 months. On the expenditure side, Cofinimmo remains committed to a more 
than EUR190 million mix of dividend and planned capital expenditure (capex) in 
2013. As a result, we anticipate that our adjusted loan-to-value ratio should 
remain at or higher than 55% over the next 12 months, which is weak for the 
current rating level. 

Although historically successful in managing its portfolio of investment 
properties, Cofinimmo remains reliant on operating conditions in the Brussels 
office rental market continuing to stabilize. Additionally, it depends on 
continuous acceptance of its strategic priorities by equity investors to help 
fund the acquisitions it targets in its more operationally stable sub segments 
of healthcare, distribution property networks, and public and private 
partnerships.

Cofinimmo has a track record of an average EUR230 million per year in disposals 
of assets and lease receivables over the past six years. This release of 
capital has helped it to diversify away from a very concentrated dependence on 
the Belgian office market. That said, we believe that this capacity to 
generate liquidity from disposals might be more constrained in the Brussels 
office market, where investments fell significantly over first nine months of 
2012, especially in peripheral districts. 

We continue to assess Cofinimmo's business risk profile as "strong," as our 
criteria define the term. We still take a positive view of Cofinimmo's 
diversification strategy into the healthcare segment, whose assets provide 
long-term cash flow visibility and support the company's revenue stability. We 
believe the expansion into healthcare offsets the currently subdued Belgian 
office market, where vacancies remain high. 

Under our base-case operating scenario we anticipate that Cofinimmo should 
continue to record low rental income growth on a like-for-like basis over the 
next two years, with EBITDA between EUR160 million and EUR170 million, as rental
demand in Belgium's office market remains subdued. We expect flat rental value 
growth owing to our view that yields from Brussels' office market won't fall 
until the end of 2013. This is based on our assumption that the increase in 
committed projects in 2013 could constrain the current absorption of the 
excess supply of office properties.

Liquidity
We classify Cofinimmo's liquidity as "adequate" under our criteria. We expect 
liquidity sources to meet funding needs by more than 1.2x in the next 12 
months.

As of Sept. 30, 2012, we estimated that liquidity needs over the next 12 
months mainly consisted of:
     -- EUR400 million in debt maturities;
     -- EUR352 million outstanding under the EUR400 million commercial paper 
program;
     -- About EUR90 million in investments, mostly acquisitions and developments
of nursing homes; and
     -- About EUR100 million in dividends subject to a partial payment offered 
in shares. 

Supporting liquidity as of Sept. 30, 2012, were the following:
     -- EUR751 million in undrawn committed credit lines;
     -- About EUR120 million of incoming funds from operations (FFO); and
     -- Proceeds from the sale of treasury shares, which should not exceed 
1,200,000 shares.

We remain cautious about the decreasing headroom between Cofinimmo's reported 
loan-to-value ratio of 52.16% as of Sept. 30, 2012, and the corresponding 
unadjusted financial covenant of 57.5%, including a six-month cure period at a 
60% loan-to-value ratio. Although this covenant concerns 32% of Cofinimmo's 
total debt we note it has not yet recovered an adequate position in the 
absence of deleveraging measures. 

Still, we believe the company's fairly good standing in the market will allow 
it to refinance its short-term maturities and maintain adequate liquidity. 

Outlook
The negative outlook reflects our view that Cofinimmo's ability to reduce its 
debt and release capital from asset disposals will remain highly dependent on 
volatile factors such as the office property market and equity markets. We 
believe the company's leverage is likely to be too high for the range that we 
consider commensurate with the current rating over the short term, due to the 
timing of disposals and investment commitments scheduled over the next six 
months. 

We might take a negative rating action if Cofinimmo accepted a continuing 
timing lag between disposals of properties and/or treasury shares and debt 
reduction or investment into income-generating assets. If Cofinimmo's 
loan-to-value ratio remained at or above 55% over the next 12 months, it would 
signal, in our view, the company's preference for a permanently weaker capital 
structure than was previously the case. We view deteriorating demand in the 
Brussels office market as the primary operating risk to Cofinimmo's ability to 
strengthen its debt protection metrics. 

We might revise the outlook to stable, if the company's capital structure 
improved significantly without divesting from core assets such that our 
adjusted loan-to-value ratio ranges moved sustainably into the 50% to 55% 
range over the next 12 months. We believe that Cofinimmo's portfolio of assets 
gives it the ability to improve its capital structure, depending on the exact 
execution of the current capital release and reinvestment plans.  

Related Criteria And Research
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Key Credit Factors: Global Criteria For Rating Real Estate Companies, 
June 21, 2011
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Cofinimmo S.A./N.V.
 Corporate Credit Rating                BBB/Negative/A-2   BBB/Stable/A-2

Ratings Affirmed

Cofinimmo S.A./N.V.
 Senior Unsecured                       BBB                
 Commercial Paper                       A-2                

Cofinimmo Luxembourg S.A.*
 Senior Unsecured                       BBB  
              
*Guaranteed by Cofinimmo S.A./N.V.

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