Fitch Places IGD's 'BBB-' Ratings on Rating Watch Negative
08/04/2020 13:55
(The following statement was released by the rating agency) Fitch Ratings-Milan/Stockholm-April 08: Fitch Ratings has placed IGD SIIQ S.p.A's Long-Term Issuer Default Rating (IDR), and senior unsecured ratings, both 'BBB-', on Rating Watch Negative (RWN). The RWN reflects the risk of a negative impact on the Bologna-based real estate company's credit profile caused by the extended coronavirus containment measures in Italy. Fitch believes a prolonged closure of non-essential retail shops will adversely affect IGD's rental income as many tenants face liquidity issues and seek a discount in rents rather than deferred payments. Fitch expects to resolve the RWN when timing of the cessation of the lockdown and its effect on IGD's tenant base is clearer, and if IGD's measures to conserve liquidity enable it to return to credit metrics consistent with its 'BBB-' rating by end-2021 or end-2022. Key considerations will include the length and severity of the containment measures in Italy, the revised contractual terms eventually agreed between IGD and its tenants, and the level of tenant defaults. We forecast that IGD will exceed our cash flow-based financial metrics for a downgrade with net debt/EBITDA above 10x in 2020 and in 2021. Should rental loss be lower than our assumptions and 2021's rent roll remain at 2019 levels, IGD could return to financial metrics consistent with its 'BBB-' rating. Key Rating Drivers Negative Impact on Retailers: Containment measures in Italy include the closure of all retail shops apart from essential stores. Since 13 March 2020 IGD has had to shut down all the retail galleries within its shopping centres, only allowing hypermarkets, tobacco shops and pharmacies to remain open. Fitch considers a protracted lockdown as negative for the majority of IGD's tenants and expects retailers to ask for a review of their rents. This could take the form of delayed payments or, if the emergency persists, discounts or rent reductions. Fitch will also assess how the Italian's government recent initiatives (yet to be enacted in law) to support rent-paying tenants, will help property companies like IGD. Food Stores Resilient: Food stores across Italy have been increasing their sales since the beginning of March when the coronavirus started to spread rapidly in the country. The limitations imposed on bars and restaurants have helped to increase grocery shops' sales. Hypermarkets account for around 25% of IGD's gross rents in Italy and represent a defensive source of income. Other essential goods retailers (such as chemists, parapharmacies and tobacco shops) which represent an incremental source of rental income, are also expected to pay their rents. Actions to Preserve Liquidity: IGD is actively engaging with its tenants to reschedule the payment of their 2Q20 (April to June) rents. The likely outcome of these negotiations is difficult to predict as it depends on when non-essential shops can reopen. However the company is implementing measures that are under its control to prevent cash outflows and preserve liquidity. Fitch forecasts a reduced investment spend for the year, limited to essential maintenance work and non-deferrable capex, and a dividend cut. Leverage Headroom Endangered: Fitch factors a 2Q20 loss in rents from non-food retailers, which account for more than 65% of rentals, resulting in around 13x net debt/EBITDA at end 2020. The spike in leverage metrics could extend into 2021 if recovery is slow and IGD's tenant base is permanently impaired. An increase in vacancies or further concessions from IGD to its tenants to preserve occupancy versus rental income will be detrimental for IGD's rating. The healthy liquidity profile of the company and its interest cover ratios are commensurate with the rating. Derivation Summary IGD's portfolio of shopping centres is similar in size to that of Atrium European Real Estate Limited (BBB/Stable) and less than a half of that of NEPI Rockcastle plc (BBB/Stable). These two central and eastern Europe shopping centre operators have stronger financial metrics, partially reflecting higher income-yielding assets that are more comparable with IGD's small Romanian portfolio. In western Europe, valuation yields for the same asset class are tighter and cash flow leverage for investment-grade REITs trends towards and above 10x. Hammerson plc (BBB/Stable), whose pro forma net debt/recurring EBITDA is around 9x, has a portfolio mainly composed of larger but low-income yield, prime and good secondary assets. UK-based NewRiver REIT plc (BBB/Stable), which also focuses on small and convenience-led shopping centres, has stronger financial metrics reflecting its higher income yield. Key Assumptions - Fitch is modelling a standard 25% loss of rental income for April to June 2020 for retail property companies. Fitch has reduced that assumption given the likely rent collected from IGD's super- and hypermarkets (around 25% of total rentals) and other essential shops that are open and trading as normal. In subsequent years, rental income may be lower because of several factors including (i) the resilience of the tenant mix - those who may recover some, or have permanently lost, sales; (ii) retailers that are vulnerable to insolvency; (iii) property companies with high exposure to expiring leases in 2020 and 2021 that may see lower rents reflecting weaker market conditions; and (iv) retail portfolios with a high occupation cost ratio and high rents that are more vulnerable to the weaker retailer environment. For IGD, Fitch has assumed 7% lower rents in IGD's 2021 profile compared with its unaffected 2019. - Many companies have announced cancellation of the latest (quarterly) dividend payment. This conserves cash. For REITs there are potential tax repercussions if the regulatory-defined minimum dividend is not paid. The tax authorities may temporarily adjust the payout rules. IGD usually pays its full-year dividend in May but this distribution has been postponed to July. Although no formal decision has been taken at the moment, Fitch assumes the dividend payment in 2020 to be lower than the one paid in 2019, but consistent with the company maintaining its SIIQ status. - For liquidity and practical purposes most property companies' capex has been, or will be, curtailed and development projects deferred. Fitch has assumed lower of capex of GBP19 million in 2020 for IGD. RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Net debt/EBITDA below 9.0x on a sustained basis - Material diversification of the portfolio by tenant - Recurring EBITDA interest cover remaining above 1.75x Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Effect of rental concessions upon IGD's future financial profile - Net debt/EBITDA above 10.0x on a sustained basis - Recurring EBITDA interest cover falling below 1.5x - LTV rising above 50% - Inability to refinance bonds well in advance of maturities leading to liquidity score falling below 1x. Best/Worst Case Rating Scenario Ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Adequate Liquidity: IGD's liquidity, which at end-2019 consisted of EUR129 million in cash and EUR60 million of undrawn committed credit lines, is healthy and compares with EUR44 million bank debt maturing in 2020. In November 2019 IGD issued a EUR400 million bond with the proceeds used to partly redeem a EUR300 million bond due in June 2021 (EUR71 million outstanding at end-March 2020). The issue reduced IGD's average cost of debt to 2.35% (FY18: 2.65%) and extended the average debt maturity to 4.1 years. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. IGD SIIQ S.p.A.; Long Term Issuer Default Rating; Rating Watch On; BBB-; RW: Neg ----senior unsecured; Long Term Rating; Rating Watch On; BBB-; RW: Neg Contacts: Primary Rating Analyst Fredric Liljestrand, Director +46 85510 9441 Fitch Ratings Espana S.A.U. (Spain) Nordic Region Filial Kungsgatan 8 Stockholm 111 43 Secondary Rating Analyst Diego Della Maggiore, Director +44 20 3530 1797 Committee Chairperson John Hatton, Managing Director +44 20 3530 1061 Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: adrian.simpson@thefitchgroup.com; Stefano Bravi, Milan, Tel: +39 02 879087 281, Email: stefano.bravi@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10111917 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10090792 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 1-https://www.fitchratings.com/site/re/968880 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10117497#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10117497#endorsement_status Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/R ating%20Definitions%20-%203%20May%202019%20v3%206-11-19.pdf DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. 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. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO