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Fitch Rates SELP's Proposed Unsecured Notes 'BBB+(EXP)'
November 2, 2017 / 6:24 PM / 16 days ago

Fitch Rates SELP's Proposed Unsecured Notes 'BBB+(EXP)'

(The following statement was released by the rating agency) LONDON, November 02 (Fitch) Fitch Ratings has assigned SELP Finance SARL's (SELP; BBB+/Stable) proposed senior unsecured notes an expected 'BBB+(EXP)' rating. The notes will rank in line with with SELP's existing bonds. Proceeds from the notes will be used to refinance SELP's remaining secured debt in France and repay what is drawn on the property company's revolving credit facility (RCF). The balance will be used for general corporate purposes, which includes funding its development pipeline. Fitch has not applied the property sector uplift due to the lack of evidence of sufficient asset liquidity in adverse market conditions for large European logistics assets compared with what we have observed for prime residential, office or retail assets. We recognise that investor demand for logistics property has increased in continental Europe in recent years as the structural shift towards e-commerce has progressed. Observed investment volumes are, however, still below those of other primary asset classes and the availability of land for industrial use in continental Europe appear less constrained than for other prime asset classes and prime logistics assets in the UK, where we have previously applied the sector uplift. A full list of ratings follows at the end of this commentary. KEY RATING DRIVERS Focus on Big-Box Assets: SELP's business profile is supported by the company's ownership and development of modern big-box assets ("big box", above 10,000 sqm) in good locations. SELP's portfolio comprises 137 buildings across 67 locations. Most of the properties are large (average building size of 24,000 sqm) and meet the latest industry building specification such as 10 metre internal height and number of loading docks. The portfolio is spread across eight countries and their main logistic infrastructures, providing geographic diversification. The average age is around 9.7 years, slightly older than peers, but a number of the older assets have undergone large refurbishment. Completes Transition to Unsecured: Repayment of the French secured debt would complete SELP's transition to an unsecured funding structure and leave only EUR59 million of debt secured on some assets located in Germany. The transaction would thus significantly reduce prior ranking debt and any adverse selection of unencumbered assets compared with the overall portfolio. The unencumbered assets amount to around 95% of total property assets at end-1H17 pro forma for the transaction. Unencumbered asset cover would be 2.4x pro forma. No Uplift for Senior Unsecured Debt: Fitch has not applied the property sector uplift to SELP's senior unsecured debt relative to the company's IDR. We have yet to see the same track record of asset liquidity and depth of investor demand in adverse market conditions for logistic property in continental Europe as we have in the UK or for asset classes in continental Europe where Fitch has applied the sector uplift. Fitch views continental European logistic assets as less land-constrained than other asset classes in more densely populated areas where stricter planning regulation and competing land uses restricts the availability of land to a higher extent. Low Leverage: The transaction will temporarily increase Fitch-adjusted gross loan-to-value (LTV) to around 40%; however, Fitch expects gross LTV to decline over the coming years as remaining bond proceeds are deployed into property. We expect net LTV to remain around 30% and net debt-to-EBITDA to remain below 6x in 2017 and 2018. SELP has a low leverage target in line with its joint venture partner SEGRO's, and we expect the company to finance future acquisition and development activity accordingly. This is supported by a shareholder agreement, which includes a through-the- cycle LTV target of 40%, a 45% deleveraging threshold and equity commitments. Favourable Market Dynamics: Recent years have seen a large increase in demand for continental modern large logistics assets in good locations, driven by e-commerce and increasingly sophisticated logistics handling. Vacancies have decreased across Europe and are approaching a low point, but Fitch believes rent dynamics are more mixed and generally less favourable than in the UK. Strong Operating Performance: Demand for logistics properties was strong in 1H17 and SELP's occupancy rate remained above 97%. SELP has successfully delivered its developments and all developments completed in 2014-2016 have been fully let. SELP's portfolio grew to EUR2.6 billion at end-1H17, boosting the company's rent roll year-on-year. Like-for-like rental growth has, however, remained subdued suggesting that supply in many of its markets has been able to respond to the growing demand. SELP's strong income stream is supported by a fairly long lease length with 5.2 years on average to first break, and a well-diversified tenant base. Some Development Risk: SELP's low vacancies illustrate the limited availability of modern well-located warehouse buildings, which the company sees as an opportunity to develop more assets. Committed capex remains limited relative to the size of its portfolio and SELP is conservative compared with its competitors in terms of speculative appetite (developments are mostly pre-let). Nonetheless, increased supply in some markets (Poland in particular) limits upward pressure on rents even as vacancies have decreased. Periodic Liquidity Creates Repayment Risk: The rating could be exposed to a periodic liquidity event. The shareholder agreement allows shareholders to request repayment from SELP, with the options ranging from the sale of assets to repay shareholders to the outright sale of a shareholding. Fitch expects the listing or sale of shares as the most likely option if either of the shareholders request liquidity. Variations from Criteria: In Fitch's view, the non-standard mechanism of SELP's periodic liquidity events from 2023 and subsequently every three years is not likely to trigger an adverse liquidity issue for bondholders. Of the various options under this scenario, the route of selling properties to repay debt and equity are controlled through the shareholder agreement's contractual mechanism requiring a 45% LTV ratio (measured on a net debt basis) to be maintained throughout the process. DERIVATION SUMMARY The rating of SELP is in line with major European REITs such as SEGRO plc (BBB+/Stable), which owns 50% of SELP, PSP Swiss Property AG (BBB+/Stable) and Hammerson plc (BBB+/Stable), reflecting SELP's strong portfolio of large industrial "big box" logistics in continental Europe. SELP's scale is smaller than closest peer SEGRO and SELP is exposed to less favourable rental dynamics in continental Europe than for logistics properties in the UK, which is reflected in its higher income yields. The portfolio is still sizable and growing with investments being supported by its two owners: SEGRO and the Canadian public sector pension fund PSP. SELP is supported by the same structural shift towards e-commerce as SEGRO and has a strong financial profile. KEY ASSUMPTIONS - Operational cost maintained at current levels. - No rental growth. - Significant development activity with EUR350 million-EUR400 million of capex during 2017-2019. - Further portfolio growth driven by around EUR300 million of net acquisitions during 2017-2019. - Net capital injection of around EUR200 million in 2017-2018 (including re-investment of paid dividends and shareholder loan interest). RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Material improvement in SELP's sector diversification; - Fitch-adjusted LTV sustainably below 30%; and - Improvement of the JV's structural limitations under the shareholder agreement. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Weaker operational profile most likely resulting from significant rise in tenant defaults, increase in vacancies or unfavourable rental like-for-like dynamics; - Net debt-to-EBITDA substantially above 7.5x (2016: 6.3x) on a sustained basis; - Deterioration in EBITDA net interest cover to below 2.0x (2016: 7.8x) on a sustained basis; - Fitch-adjusted LTV above 40% on a sustained basis; - Liquidity score below 1.25x (committed undrawn facilities plus cash divided by debt maturities and committed capex) over 18-24 months; and - Deterioration in unencumbered asset cover to significantly below 2.0x on a sustained basis LIQUIDITY Comfortable Liquidity: SELP had EUR87 million in readily available cash and EUR80 million in undrawn revolving credit facilities at end-1H17 with no maturities in the following 24 months. The proposed transaction will extend maturities further by repaying EUR201 million of secured debt maturing in 2020. Following the bond issuance we expect the RCF to be fully undrawn. SELP had EUR49 million of committed capex and EUR64 million of contracted acquisitions at end-1H17. Fitch further takes comfort that SELP's acquisitions and capex require shareholder approval and shareholders must agree to provide funds as required according to the shareholder agreement. FULL LIST OF RATING ACTIONS Fitch has assigned the following rating: SELP Finance SARL -- Proposed senior unsecured notes assigned at 'BBB+(EXP) The following ratings are unaffected: SELP Finance SARL -- Long-Term Issuer Default Rating (IDR) at 'BBB+'; Outlook Stable -- Senior unsecured rating at 'BBB+' SEGRO European Logistics Partnership SARL -- Long-Term Issuer Default Rating (IDR) at 'BBB+'; Outlook Stable Contact: Contact: Principal Analyst Bram Cartmell Senior Director +44 20 3530 1874 Supervisory Analyst Fredric Liljestrand Associate Director +44 20 3530 1285 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Date of Relevant Rating Committee: 10 November 2016 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. 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