First-time rating
London, 21 May 2012 -- Moody's Investors Service has today assigned a first-time
issuer rating of Baa3 with a stable outlook to Goodman European Logistics
Fund (GELF). GELF is an unlisted real estate fund that makes direct
investments in modern prime logistics properties across 11 countries in
Europe.
RATINGS RATIONALE
"GELF's Baa3 rating primarily reflects the strong brand name
and franchise value brought to the fund by its external manager and largest
unit-holder, Goodman Group, a listed Australian industrial
real estate investment trust, or REIT, and recognised leader
in logistics property," says Lynn Valkenaar, a Moody's
Vice President -- Senior Analyst and lead analyst for GELF.
"Other key strengths underpinning the rating are (1) GELF's
high-quality portfolio of modern prime logistics properties,
which have persistently high occupancy rates and broad geographic diversification,
providing the fund with sustained positive cash flows from operations;
and (2) a lower business risk profile than similarly rated peers,
because the fund's development activity represents only a small
proportion of its assets," adds Ms Valkenaar.
GELF's financial strength also supports the rating. At financial
year end 2011, the fund's effective leverage (total debt/gross
assets, as adjusted by Moody's) was a moderate 43%
and its fixed charge coverage (adjusted EBITDA/gross interest expense
+ capitalised interest + ground rents, as adjusted by
Moody's) was 2.8x.
These strengths are counterbalanced by the fund's smaller scale
relative to similarly rated peers and its exposure to income concentration
risk, with its top 10 customers accounting for almost half of its
revenues in the financial year 2011.
Moody's also factors into the rating its cautious outlook for European
logistics property this year. Tenant demand is related to economic
growth as well as the growth in world trade, both of which are expected
to remain below long-term averages in 2012. Therefore,
there is at present considerable uncertainty surrounding tenant demand.
On the other hand, large consumers of logistics space are seeking
to consolidate into bigger, modern facilities such as those offered
by GELF. As a result, Moody's expects that GELF will
continue to experience downward pressure on rents in some locations,
although it will benefit from rental growth in others, as in 2011.
Moody's considers that GELF's liquidity is currently adequate,
with the fund's earliest debt maturity in December 2013.
However, the fund faces a "liquidity review" in 2016,
when unit-holders wishing to withdraw their equity stake may do
so. The rating assumes that the liquidity review will provide no
disruption to the business, nor will it negatively affect the fund's
financial strength. This view reflects (i) proven unit-holder
support, as evidenced by GELF's multiple equity raises over
the past 5.5 years; (ii) the fact that Goodman Group already
provides limited but ongoing liquidity to other unit-holders on
a quarterly basis; (iii) the maintenance of strong corporate governance
principles that are aimed to align Goodman Group's interests with
those of the unit holders; and (iv) that GELF's bank covenants
ensure that any cash proceeds from the sale of assets must amortise debt
in priority to refunding unit-holders' investments.
The stable outlook reflects GELF's sound financial position,
steady cash flow generation and the expert management provided by Goodman
Group (Baa2 stable). The European logistics market has not yet
fully recovered from lower levels of growth in world trade and economic
output in Europe. However, in Moody's view, GELF's
deleveraging plan should protect its financial metrics from the downward
pressure on rents that is expected to continue in some of its locations
through 2012. The stable outlook also assumes that GELF's
financial covenants will continue to protect unsecured lenders effectively
from the liquidity review in 2016 and that the fund will maintain an adequate
liquidity profile at all times.
WHAT COULD CHANGE THE RATING UP/DOWN
Although unlikely in the near term, upward pressure on the rating
or outlook could arise as GELF develops greater scale and tenant diversification
in conjunction with (i) reducing its leverage, as measured by total debt/gross
assets(as adjusted by Moody's), to materially
below 40% and maintaining fixed charge coverage above 2.75x
on a sustainable basis; (ii) maintaining the ratio of secured debt/gross
assets below 20%; and (iii) preserving its policy to largely
acquire completed investments rather than develop them.
Downward pressure on the rating could arise if (i) GELF's business
risk profile weakens as a result of an increased concentration of tenant
income or an enlarged development programme that exceeds 7.5%
of gross assets on a sustained basis; (ii) its financial covenants
cease to protect unsecured lenders effectively from liquidity reviews
or Moody's develops other liquidity concerns; or (iii) the
fund's financial metrics deteriorate such that it fails to maintain
(a) its fixed charge coverage ratio comfortably above 2.2x;
(b) effective leverage at or below 45%; or (c) secured debt/gross
assets below 25%.
The principal methodology used in rating GELF was Moody's Approach
for REITs and Other Commercial Property Firms, published in July
2010. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
Goodman European Logistics Fund is registered in Luxembourg as an unlisted
"fonds commun de placement" that specialises in logistics
property investments. The fund reported EUR124 million (approximately
USD 95 million) in revenues and EUR 1.7 billion in total assets
in the financial year ended 31 December 2011.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
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this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
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the lead rating analyst and to the Moody's legal entity that has issued
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Lynn Valkenaar
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
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Releasing Office:
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Moody's assigns Baa3 to Goodman European Logistics Fund, stable outlook
