This article is from the Australian Property Journal archive
STANDARD & Poor's has placed its long-term 'A-' corporate credit rating on Westfield on CreditWatch with negative implications along with the long-term 'A+' rating on Westfield Retail Trust (WRT).
At the same time Standard & Poor’s has affirmed the ‘A-2’ short-term corporate credit rating on Westfield and the ‘A-1’ short-term corporate credit rating on WRT and removed it from CreditWatch positive.
The CreditWatch actions follow Westfield and WRT’s announcement yesterday to demerge the Australian and New Zealand from the international business, the local REIT called Scentre Group (Scentre), while Westfield Corporation which will hold assets in United States, United Kingdom and and Italy.
Standard & Poor’s credit analyst Graeme Ferguson said Scentre will have an asset base of $A28.5 billion and a development pipeline of $A3 billion (Scentre’s share: $A2 billion) and Scentre’s June 30, 2013 pro-forma debt to assets will be 38.2%, a material increase from WRT’s actual ratio of 22.1% at June 30, 2013.
“We note that the proposal includes an equity-friendly $A850 million capital return which, in our view, meaningfully elevates the financial risk,” he added.
Ferguson said the proposed demerger would enhance WRT’s competitive position, however comes with a risk of exposure to redevelopment.
“The size and scale of the portfolio would improve with an exposure to high-quality shopping center assets. However, the demerger would also result in an exposure to asset redevelopment.
“We expect the high-quality income from the Australian and NZ assets to support our strong assessment of the group’s business risk profile,” he added.
At the same time, Ferguson expects Westfield Corporation’s competitive position could come under pressure due to weakened asset quality and a heightened exposure to asset redevelopment.
“In addition, the new group would no longer receive high-quality income from the Australian and NZ assets.
“We are cognizant that WDC has established relationships with retailers globally, and we would want to understand how this dynamic would evolve in the new structure. We would also need to explore the operating strategy of Westfield Corporation toward expansion into new markets and the introduction of capital partners that the group has previously employed to reduce asset concentration and funding requirements,” he continued.
“While we note that the pro-forma leverage will be modest at the outset, Westfield Corporation’s financial policies and the extent to which it will incur substantial development exposure are key considerations. An increase in assets under redevelopment may heighten the risk of disruption to the operating stability of the group.
“It is uncertain whether Westfield bond-holders will lose the cross-guarantee structure upon the transfer of the Australian and NZ assets to WRT or whether there will be any restructuring or repayment of any bonds on issue. Given this potential development, we will need to consider the bridging facilities that Westfield Corporation may have in place at demerger and the matching of the currency of the future debt, given the narrower asset base,”
“For Westfield Retail Trust, we would seek to resolve the CreditWatch after reviewing the scheme documents and the independent experts’ report. Importantly, we would seek clarity on the future financial policy settings. If the demerger is successful in its current form, the long-term rating on WRT could be affirmed or lowered by one notch to ‘A’, depending on our assessment of the group’s future financial risk appetite,” Ferguson said.
“For Westfield Group, we will consider any changes to its financial policies; its ability to grow the offshore assets as a smaller entity; and its retailer relations going forward both for its existing assets and proposed new developments.
“If the demerger is successful in its current form, the long-term rating on Westfield Group would likely be lowered to ‘BBB+’, assuming the group’s financial policies are more conservative to reflect the weaker competitive position. If the financial policies remain the same, further downward rating pressure could result,” Ferguson warned.
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