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Fitch Places Hammerson's Ratings on Negative Watch
December 7, 2017 / 7:17 PM / 6 days ago

Fitch Places Hammerson's Ratings on Negative Watch

(The following statement was released by the rating agency) LONDON, December 07 (Fitch) Fitch Ratings has placed Hammerson PLC's Long-Term Issuer Default Rating (IDR) of 'BBB+' on Rating Watch Negative (RWN), along with the senior unsecured rating of 'A-'. This action, which indicates that the rating could stay at its present level or potentially downgraded, follows the recent announcement that the company will acquire UK-based real estate and investment company Intu Properties PLC. Under the terms of the all-share transaction, Intu shareholders will receive 0.475 of new Hammerson shares for each existing Intu share held. Hammerson's shareholders will ultimately own 55% of the merged entity, with Intu's shareholders owning the remaining 45%. A complete list of ratings is provided at the end of this release. While Fitch believes the potential strategic benefits associated with the combination of these companies are significant, the rating action reflects Fitch's concerns the acquisition may cause the combined company's financial leverage metrics to deteriorate to a level more commensurate with a lower rating. In addition, the combined capital structure is expected to include a significantly higher proportion of secured debt, which may limit contingent liquidity and may impact recovery prospects for unsecured debt negatively. KEY RATING DRIVERS Material increase in portfolio strength: Fitch believes the acquisition will improve the business profile of the company. Hammerson's prime portfolio of UK, French and Irish shopping centres, which is valued at around GBP10 billion, has high occupancy ratios of around 98% and stable rental income. The merger will more than double the property portfolio to more than GBP20 billion, making it the largest UK property company, with a number of large, prime retail assets, including Trafford Centre in Manchester, which has an annual footfall of more than 31 million, and Lakeside, with footfall of more than 25 million. Hammerson's post-transaction portfolio will include more than half of the UK's top 20 retail assets by footfall and square footage. While both portfolio's occupancy rates exceed 95%, Hammerson's performance has been stronger - Hammerson's like-for-like net rental growth has averaged 2.5% over the past five years, compared to Intu's average of -2.4%, although Intu's growth has been positive over the past two years. Improved diversification: As Hammerson's portfolio is mainly large shopping centres, there is a degree of asset concentration, with the top 10 assets contributing 55% of total rent for 2016. Similarly, Intu's portfolio, which also includes many large retail assets, has relatively high asset concentration, with the top 10 assets accounting for around 80% of value and rent. Under the combined portfolio, the top 10 assets account for well under 50% by value and rent. Intu's top 10 tenants account for around 26% of rental income, compared to around 18% for Hammerson. Although there are a number of common tenants between the two companies, tenant concentration should also reduce after the merger. Potential financial weakening: Hammerson's leverage is currently somewhat higher than peers in terms of loan-to-value (LTV), which was 44% at YE 2016, and Fitch-defined net debt-to-EBITDA, which was around 10.5x. Fitch is concerned that financial metrics may deteriorate following the merger, owing to the higher leverage of Intu. Fitch estimates that LTV will potentially exceed 45% (1H17 pro forma), while net debt-to-EBITDA may remain above 10x (1H17 pro forma). These are more commensurate with a 'BBB' rating. The company intends to dispose of approximately GBP2 billion of assets in the future to partially reduce debt, as well as eliminate non-strategic assets to better line up the portfolio. Nevertheless, the effect on leverage is currently unclear, as the timing and target assets have not yet been clarified. More secured debt: Hammerson's debt of approximately GBP3.8 billion is around 10% secured. Intu's current debt, which is reported at around GBP4.8 billion at 1H17, is almost fully secured. In the event that the merger of Hammerson and Intu results in secured debt-to-total debt that is above the requirement of approximately 20% or less, or the unencumbered asset value to senior unsecured debt ratio falls below 2.0x without any mitigation, Fitch may remove the current one-notch uplift applied to Hammerson's senior unsecured debt ratings, and align the senior unsecured debt rating with the IDR. Fitch notes that Hammerson expects to refinance a portion of Intu's secured debt, which would leave more assets unencumbered. RATING SENSITIVITIES Fitch expects to resolve the RWN once the transaction has closed or with confirmation of the new capital structure. Should Fitch view the acquisition of Intu as meaningfully weakening Hammerson's financial strength, debt service capabilities or secured position, the IDR could be downgraded by one notch and the senior unsecured ratings could be aligned if the uplift is removed. Otherwise, the current ratings could be removed from Rating Watch Negative and affirmed. Hammerson's current sensitivities are as follows: Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --LTV below 40% on a sustained basis. --EBIT net interest cover (NIC) above 2.5x on a sustained basis. --Unencumbered asset cover above 2.5x on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Significant rise in tenant defaults and lease arrears, leading to a material fall in total rents. --LTV above 45% on a sustained basis. --EBIT NIC below 1.75x over a two-year period. FULL LIST OF RATING ACTIONS Fitch has placed the following ratings on Rating Watch Negative: Hammerson PLC Long-Term Issuer Default Rating of 'BBB+', Stable Outlook Long-Term senior unsecured rating of 'A-' Contact: Principal Analyst Fredric Liljestrand Associate Director +46 8 562 80 910 Supervisory Analyst Shiv Kapoor Analyst +44 20 3530 1509 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Bram Cartmell Senior Director +44 20 3530 1874 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Solicitation Status here#solicitation 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 WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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