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Rating Action:

Moody's assigns Baa3 to Goodman European Logistics Fund, stable outlook

Global Credit Research - 21 May 2012

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 to each rating of a subsequently issued bond or note of the same series 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 rating practices. For ratings issued on a support provider, 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Lynn Valkenaar
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Baa3 to Goodman European Logistics Fund, stable outlook
No Related Data.

 

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