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Fitch Affirms Atrium at 'BBB-'; Outlook Stable
April 6, 2017 / 4:47 PM / 8 months ago

Fitch Affirms Atrium at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON/PARIS, April 06 (Fitch) Fitch Ratings has affirmed Atrium European Real Estate Limited's (Atrium) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-' and Short-Term IDR at 'F3'. The Outlook is Stable. KEY RATING DRIVERS Russia Reaching Cyclical Bottom: Russian operations posted a small revaluation gain in 2016 and like-for-like (lfl) net rental income (NRI) trends improved at end-4Q16 (-3% lfl), suggesting that Russian operations are stabilising. This follows a 30% drop in the valuation of the Russian portfolio and NRI during the Russian crisis. Fitch Ratings expects Atrium's Russian tenants to strengthen, supported by our expectation of growing GDP for the first time in two years (1.4%), and aided by the rouble which rebounded by more than 30% from its 2016 low point. Less-Encumbered Balance Sheet: Atrium made another early secured-loan repayment. It has almost fully freed its balance sheet with close to 84% unencumbered assets. It has a large pool of unencumbered assets with no adverse selection, which could support liquidity. This gives Atrium's management more flexibility to tailor its portfolio according to its strategy and take action on overperforming or underperforming assets. Improved Asset Mix: Atrium continues to improve the quality of its portfolio, acquiring and developing several large shopping centres in Poland and the Czech Republic. The company has also disposed of a large part of its smaller assets. Changes in valuations illustrate the merits of this strategy as higher yields on smaller assets have diverged from lower yields on bigger assets. Atrium's portfolio is now more concentrated, but in higher-quality assets with the top 10 now representing 63% of the latest portfolio against 58% in 2012. It has also increased its exposure to more stable countries, with Poland now accounting for 58% against 38% in 2008. Adequate Operating Key Peformance Indicators: Negative like-for-like NRI growth (-2.3%) in 2016 was driven mostly by poor performance in Russia, hiding Atrium's underlying growth of 1.8% (0.5% in 2015). The disposal of smaller assets in the Czech Republic is supportive. Occupancy levels of 96% are high, even though occupancy in Russia came under pressure in 2016. Average lease length decreased to 4.9years but remains close to the investment-grade mid-point of five years. Low Leverage: Fitch-adjusted LTV remains comfortable for the rating at around 33% at end-2016 even after the company paid a special dividend in September 2016. Atrium's largest assets are likely to have benefited from a yield -shift revaluation gain, but we believe this effect will have been less than for its peers in western Europe. Net debt to EBITDA remains low at around 6x and interest cover comfortable at around 4x. Atrium updated its maximum legacy legal settlement to EUR44 million and the related remaining cash outflow should not meaningfully impact the leverage DERIVATION SUMMARY Atrium is smaller than most EMEA REITs, but leverage is lower both in terms of LTV and net debt to EBITDA. Other key performance indicators are in line with low vacancies and reasonably long average lease length. Atrium's 'BBB-' rating with a Stable Outlook is driven by its exposure to some of the more volatile and less liquid central and eastern European markets, especially Russia. Higher-rated peers such as British Land (BBB+/Positive) and Unibail (A/Stable) have assets in the higher-rated economies in western Europe which Fitch views as being more liquid. With EUR2.6 billion of investment properties, the company is smaller than its western peers, although above the EUR1.5 billion asset size threshold for an investment-grade rating. Atrium's relatively weak business profile when compared with its peers is offset by its solid and now almost fully unencumbered balance sheet, and low Fitch adjusted net LTV of around 30% which compares favourably with most peers. KEY ASSUMPTIONS - Stabilisation of rents from Russian assets - Restricted cash of EUR40 million for the Meinl settlement RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Further improvement of the quality of the portfolio and liquidity of central and eastern European investment markets, while maintaining similar leverage - Rationalisation of assets in markets in which Atrium has limited geographic critical mass. - Improved sources of liquidity evidenced by a diversification of funding sources such as an undrawn committed credit line Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - LTV (adjusted net debt/investment properties) consistently above 40% - EBIT net interest cover below 2.5x on a sustained basis - Liquidity score below 1.25x on a two-year cycle on a sustained basis - Unencumbered asset cover ratio below 2.0x to 3.0x on a sustained basis LIQUIDITY Atrium has almost no debt maturing over the coming years (EUR11 million over the period 2016-2019) and has EUR175 million of committed and undrawn revolving credit facilities maturing in 2019- 2020, with options to extend for a further year. Contact: Principal Analyst Jean-Baptiste Bouillaguet Associate Director +44 20 3530 1606 Supervisory Analyst Bram Cartmell Senior Director +44 20 3530 1874 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Paul Lund Senior Director +44 203 530 1244 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor must be disclosed (in bullet points). Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee. This disclosure should appear after the analyst contact information. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021780 Solicitation Status here Endorsement Policy 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 WEB SITE AT <a href="https://www.fitchratings.com">WWW.FITCHRATINGS.COM.. 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