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Rating Action:

Moody's affirms Atrium European Real Estate's Baa3 ratings, outlook stable, Ba2 rating assigned to hybrid notes

22 Apr 2021

Frankfurt am Main, April 22, 2021 -- Moody's Investors Service (Moody's) has today affirmed the Baa3 long-term issuer rating and the Baa3 senior unsecured ratings of Atrium European Real Estate Limited (Atrium). It has also affirmed the Baa3 long-term issuer rating and senior unsecured rating of Atrium Finance Issuer B.V., both backed by Atrium. Subsequently, it has assigned a Ba2 rating to the new subordinated (hybrid) notes to be issued by Atrium. The outlook on the ratings of both entities has been changed to stable from negative.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

Atrium's Baa3 long-term issuer rating confirmation reflects the company's leading market position as shopping centre operator in Central and Eastern Europe (CEE) focused on the economically dynamic cities of Warsaw and Prague (55% of portfolio value). The company operational track record is solid characterized by positive like-for-like rental evolution and capital value accretion through an active portfolio management and redevelopment activities. Other key strengths underpinning the rating include an ample unencumbered asset base of more than 70%, its moderate leverage, a solid fixed-charge coverage and a long-dated debt-maturity profile with no material refinance needs in the next 18 months.

Over the next 3-5 years the company targets a diversification into the residential segment, which we view as credit enhancing considering its defensive nature and solid long-term fundamentals, driven by noncyclical factors like urbanisation, shrinking household size and lagging supply in Poland, notably in Warsaw. We understand that Atrium will fund its expansion into the build-to-rent residential segment in line with its financial policy and with a substantial share of own capital.

Credit challenges to the rating are the still difficult operating environment for retail landlords across Europe with demand for space remaining subdued next to prevailing bankruptcies' risk in the retail sector. Both could erode occupancy in the next 12-18 months or make Atriums to offer further concessions to keep or attract tenants. Other rating challenges are the company's Russia (Baa3 stable) exposure, representing around 10% of asset value and about 20% of net rental income, which is earmarked for disposal in the medium term but in the meanwhile could potentially introduce some earnings and valuations volatility.

The Ba2 rating assigned to the subordinated (hybrid) notes to be issued by Atrium reflects the deeply subordinated nature of the hybrid notes. The subordinate hybrid notes qualify for a Basket C or 50% equity treatment under Moody's methodology. The hybrid issue is a perpetual deeply subordinated debt instrument that is treated as a preferred equivalent under Moody's methodology. If preferred shares begin to be issued in the same jurisdiction by similar issuers -- the equity credit assigned would be revisited. The Interest rate has resettable fixed interest rate periods over time but there is no step up in interest rate beyond 1% over the initial credit spread and no step up before year ten. There is optional deferral, which is cumulative. Any deferred interest must be paid if there is a payment on junior or parity instruments. There is also a 5% step up upon a Change of Control and a rating downgrade to a non-investment grade rating in respect of that Change of Control.

RATIONALE FOR STABLE OUTLOOK

The outlook change to stable from negative reflects our view that the company's bolstered balance sheet and ample liquidity will allow Atrium to successfully navigate through the prevailing coronavirus-driven business disruptions while preserving credit ratios commensurate with its current Baa3 guidance. We also note the group's commitment to a financial policy of maintaining its reported loan-to-value LTV at below 40%.

As of today, the company has undertaken several measures to protect credit metrics including the announced placement of new hybrid notes and the introduction of a scrip dividend which was subscribed by the company's main shareholder Gazit in 2020. Atrium has also successfully concluded and plans further non-core assets disposals with the bulk of proceeds being earmarked to reduce financial leverage. As of 31 December 2020, Moody's-adjusted gross debt/total assets stood at 40.1%, with a Moody's-adjusted Net debt/EBITDA of 10.7x and a Moody's-adjusted fixed charge coverage of 2.5X.

Once the health crisis has been brought under control, we expect the recovery of the sales and footfall at Atrium's shopping centres to be fuelled by strong long term economic and property market fundamentals of its core markets Poland (A2 stable) and the Czech Republic (Aa3 stable).

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A rating upgrade could materialize under a stabilized operating environment for retail real estate in CEE and if Atrium:

- Maintains a large-scale and diversified portfolio of high-quality and dominant shopping centres in major cities of highly rated countries while showing a strong operational performance as measured by like-for-like rental growth, footfall, overall retail sales, retail sales per square meter and occupancy cost ratio for retailers

- Maintains a Moody's-adjusted gross debt/total assets below 40%, with financial policies that support that level and limit the payment of special dividends, together with a declining trend of Moody's-adjusted net debt to EBITDA towards the levels reported before the coronavirus pandemic

- Maintains a Moody's-adjusted fixed-charge coverage sustained above 3.5x

- Maintains a Moody's-adjusted unencumbered assets / gross assets around their current levels

- Conservative funding of the company diversification strategy into the residential segment

Negative rating pressure could develop if contrary to our expectations a return to more normal operating conditions with a large part of Atrium's gross leasable area (GLA) back into operations doesn't occur by the summer, resulting in a high level of retailer distress, sustained weakening of occupancy and pressure on cash flows due to rent concessions. Other factors that could lead to a downgrade include:

- Structural deterioration of operating environment for retail landlords in CEE translating into sustained decline of like-for-like rental growth, footfall and retail sales with rising vacancy

- Moody's-adjusted leverage sustained above 45% with an increasing trend of net debt to EBITDA from current levels or Moody's-adjusted fixed-charge coverage sustained below 2.5x

- A sharp and persistent deterioration in local currencies against the euro, which would force the company to heavily discount rents on a long-term basis

- If material execution risks would arise as the company diversifies into the residential segment or if these investments are funded substantially with debt

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Governance risks that we consider in Atrium's credit profile include the company's concentrated ownership in its key shareholder Gazit, who controls around 72% of the shares and could eventually limit a broader access to equity capital. This risk is partially mitigated by the company's track record of good corporate governance and its public listing on the Vienna and Amsterdam stock exchanges.

LIST OF AFFECTED RATINGS:

..Issuer: Atrium European Real Estate Limited

Affirmations:

.... LT Issuer Rating, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Assignments:

....Subordinate Regular Bond/Debenture, Assigned Ba2

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Atrium Finance Issuer B.V.

Affirmations:

.... BACKED LT Issuer Rating, Affirmed Baa3

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Atrium owns a €2.5 billion portfolio of 26 shopping centres totalling around 809,000 thousand square metres (sqm). In 2020, the company generated around €139 million of annual rent after a €26 million negative rental income impact from Covid-19-related rent relief and tenant support. The company is focused on the more stable CEE countries of Poland and Czech Republic where 85% of its centres by value are located. The average value of the company's shopping centres is €94 million, with an average size of around 31,100 sqm.

Atrium is based in Jersey, Channel Islands, and has a dual public listing on the Vienna and Amsterdam stock exchanges, with a market capitalization of around €1.1 billion as of 19 April 2021.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ana Luz Silva Robles
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke Rindermann
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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