March 26, 2013 / 8:06 PM / 5 years ago

Fitch Initiates 'BB-' IDR on Forest City; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 26 (Fitch) Fitch Ratings has assigned initial credit ratings to Forest City Enterprises, Inc. (NYSE: FCEA/FCEB, collectively FCE) as follows: --Issuer Default Rating (IDR) 'BB-'; --Bank revolving credit facility 'BB-'; --Senior unsecured notes 'BB-'; --Convertible senior unsecured notes 'BB-'. The Rating Outlook is Stable. KEY RATING DRIVERS The 'BB-' IDR centers on FCE's high leverage and lack of unencumbered assets. FCE's corporate financing strategy emphasizes secured debt to isolate refinancing and operating risks to individual properties as opposed to the general corporate credit and equity holders. Credit strengths include the quality of FCE's portfolio, strong relative operating performance, adequate fixed charge coverage, manageable debt maturity schedule and sufficient internal liquidity. The IDR also reflects FCE's significant equity cushion after adjusting for secured debt that partially mitigates the lack of an unencumbered asset pool. Further, FCE's REOC structure is worth a one-notch uplift relative to a comparable REIT, due to FCE's ability to retain cash for development and other corporate uses. High Leverage FCE's leverage was high at 11.9x for the nine months ended Oct. 31, 2012. FCE has made demonstrable progress in its efforts to delever, as leverage was 13.0x at Jan. 31, 2011. Fitch projects leverage will improve further to below 11x over the next 24 months, driven by modest same-store net operating income (SSNOI) growth. Fitch defines leverage as net debt to recurring operating EBITDA. Lack of Unencumbered Assets FCE does not maintain a pool of unencumbered assets which typically serves as support for IDRs of higher-rated REITs and REOCs and a source of contingent liquidity. The lack of unencumbered assets is a material rating constraint partially mitigated by the existence of a post-secured debt equity cushion. High-Quality Albeit Idiosyncratic Portfolio Since its founding, FCE has grown its expertise in developing large, mixed-use master planned communities, notably those in densely populated markets. Year-to-date (YTD) net operating income (NOI) was well-diversified by segment (35% office, 33% retail, 24% multifamily) and located in strong markets (29% in New York City with Washington, D.C., Los Angeles, Boston, San Francisco, Denver, Chicago and Philadelphia each comprising 4%-10%). Strong Operating Performance FCE's operating performance has been strong on an absolute basis and relative to its underlying markets and select public peers, evidencing durable operating cash flows. FCE's SSNOI growth has averaged 1.9% since 2003 and FCE weathered the recent downturn with only a single-year decline of 0.8% in 2009. Fitch expects SSNOI growth will be in the low single digits over the next 12-24 months driven by positive leasing spreads and incremental occupancy gains. Proven Track Record Developing Large, Mixed-Use Sites The company has a proven capacity to acquire, aggregate and entitle adjoining plots of land and to work with local municipalities, community groups and government agencies to receive requisite approvals and tax credit financings. Going forward, Fitch expects development to be significantly smaller, due mostly to the Multifamily Development Fund which will allow FCE to develop off balance sheet and limit its equity requirements to contributing entitled land. At Oct. 31, 2012, FCE remaining development commitments of $141 million represent less than 2% of total assets and can be funded through internal liquidity. Manageable Debt Maturity Schedule / Sufficient Liquidity Liquidity coverage of 0.6x is adequate for the rating for the period Nov. 1, 2012-Jan. 31, 2015 and improves to 2.2x assuming 90% of secured debt is refinanced. Notably, internal liquidity covers unsecured debt obligations maturing through FY2015 by 3.8x, thereby limiting the likelihood of a corporate default. In addition the covenants under the company's credit facility that limit cash distributions and share buybacks facilitate financial flexibility. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the revolving credit facility, committed but undrawn project financing) divided by uses (unsecured debt maturities, secured debt maturities, pro-rata unconsolidated debt maturities, maintenance capital expenditures and committed development expenditures). Adequate Fixed Charge Coverage Fitch projects fixed charge coverage will improve to 1.5x from 1.3x for FY2011 over the next 12-24 months driven by lower fixed charges from the retirement of all outstanding preferred stock. Fitch defines fixed charge coverage as recurring operating EBITDA less straight line rent adjustments and maintenance capital expenditures divided by total interest incurred and preferred stock dividends. RATINGS SENSITIVITIES Although Fitch does not anticipate positive ratings momentum in the near-to-medium term, the following factors may result in positive momentum on the rating and/or Outlook: --The maintenance of a sizable unencumbered asset pool; --Fitch's expectation of leverage sustaining below 10.0x (leverage was 11.9x as of Oct. 31, 2012). The following factors may have a negative impact on Forest City's ratings or Outlook: --Fitch's expectation of leverage sustaining above 13.0x; --Fitch's expectation of fixed charge coverage sustaining below 1.0x (fixed charge coverage was 1.3x YTD); --Material growth in on-balance-sheet development projects; --A material investment in a non-real estate project or entity. Contact: Primary Analyst Britton Costa Associate Director +1-212-908-0524 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Daniel Chambers Managing Director +1-212-908-0782 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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: --Criteria for Rating U.S. Equity REITs and REOCs, February 26, 2013; --Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, Dec. 13, 2012; --Recovery Rating and Notching Criteria for Equity REITs, Nov. 12, 2012; --Corporate Rating Methodology, Aug. 8, 2012. Applicable Criteria and Related Research Recovery Ratings and Notching Criteria for Equity REITs here Corporate Rating Methodology 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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