STANDARD & Poor's has further lowered its rating of the Australian REITs sector and the agency has downgraded Goodman Group and Mirvac credit outlook.
S&P Ratings Services’ credit analyst Craig Parker has taken a number of rating actions AREITs after a review of the sector concluded that credit quality of about 30% of the rated portfolio had weakened.
“As we indicated in the last review of the AREIT sector (“Global Financial Woes Fray Credit Quality, But Australia’s Rated REITs Are Holding Firm, For Now“, published to RatingsDirect on October 6, 2008), the longer the difficult conditions in capital markets extend, the more likely it becomes that our overall ratings bias on the sector could shift negative.
“Six months later, ongoing refinancing pressures and sticky debt levels have contributed to our more negative view of the AREIT sector, which is reflected in the recent negative rating actions taken,” he added.
In addition, S&P has also lowered its long-term corporate credit ratings on Goodman Group from (BBB+/Watch Neg/–) to )BBB/Negative/–), and Mirvac from (BBB/Watch Neg/A-3) to (BBB-/Stable/A-3).
“Against a backdrop of uncertain and volatile macroeconomic conditions, we have taken a number of negative rating actions on the AREIT sector in the past few months, largely because of a scarcity of debt funding, rising capitalization rates, and weakening financial metrics,” he continued.
S&P has also revised the rating outlook on GPT Group from (BBB/Stable/A-2) to (BBB/Negative/A-3).
Parker said the agency’s heightened focus on the sector’s exposure to volatile development earnings, modest earnings coverage, high debt levels, liquidity to meet forthcoming commitments, and access to capital were partly reflected in the latest rating actions on Goodman, GPT, and Mirvac.
Parker said whilst he does not believe that credit quality for the majority of the AREIT sector is likely to come under immediate pressure in 2009, the sector’s maturing debt in 2010, combined with the potential for decelerating rental growth for most property types — has accentuated concerns for AREITs with large capital needs.
“We note that this real estate downturn is unique in that both the tenants (who provide annuity-style income) and the debt financiers (who are the traditional liquidity providers) are both under stress.
“We are observing that there is a growing reluctance by the traditional property bankers to grant AREIT requests for additional flexibility in their revolving credit facility covenants; at the same time, these bankers are seeking to limit their exposure to single AREIT names.
“Furthermore, it seems these banks are increasingly reluctant to yield to such requests without receiving additional reassurance, which they achieve by reducing borrowing capacity, raising borrower costs, and/or requiring collateral in exchange for the revised terms,” he continued.
“Although we believe that some of the headwinds faced by AREITs are part of the normal real estate cycle, the longer the difficult conditions in capital markets extend, the more likely it becomes that our overall ratings bias will continue to shift negative.
“If we find that 2010 is likely to continue to remain weak, with non-real estate-related extraneous factors continuing to drag the sector down, we expect that some of the investment-grade ratings in the portfolio may continue to transition down the credit curve,” he warned.
Australian Property Journal
