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Rating Action:

Moody's downgrades ARCP unsecured debt to Ba1; negative outlook

16 Dec 2014

Approximately $2.5 Billion of Debt Securities Affected.

New York, December 16, 2014 -- Moody's Investors Service downgraded the senior unsecured rating of American Realty Capital Properties, Inc. (ARCP) to Ba1 with a negative outlook due to ARCP's announcement that its Chairman Nicholas Schorsch resigned on December 12 and its CEO David Kay and President/COO Lisa Beeson resigned on December 15. Moody's rating action reflects the continued uncertainty surrounding the unsecured debt rating from the accounting, legal and investment banking reviews. This concludes the review started on October 30, 2014. Moody's negative rating outlook reflects the uncertainty and the ultimate impact to ARCP's operating and capital structure as the REIT searches for a new management team, in addition to the lawsuits regarding its accounting irregularities, its timely filing of 3Q14 and YE14 financials, and implementation of better financial controls.

The following ratings were downgraded with a negative outlook:

American Realty Capital Properties, Inc. -- Senior unsecured shelf to (P)Ba1, from (P)Baa3; subordinate shelf to (P)Ba2, from (P)Ba1; preferred stock shelf to (P)Ba2, from (P)Ba1.

ARC Properties Operating Partnership, L.P.- Senior unsecured debt to Ba1, from Baa3.

The following rating was withdrawn:

American Realty Capital Properties, Inc. -- Issuer rating at Baa3.

RATINGS RATIONALE

The Ba1 unsecured rating reflects that ARCP has not filed its 3Q14 10Q yet and the audit committee continues to work with its advisors to complete its investigation into financial information contained in ARCP's 2013 10K and its quarterly reports for the first two quarters of 2014. William Stanley, ARCP's Lead Independent Director has become Interim CEO until permanent replacements are found. ARCP has an extension from its revolver bank group until January 5, 2015 to file 3Q14 financials. ARCP is currently in compliance with its covenants on the revolver and bonds.

In October 2014, ARCP's Audit Committee concluded that its 2013 10-K and 1Q14 and 2Q14 10-Qs should no longer be relied upon. Its conclusions were made after accounting and legal investigations into its financial results. These accounting irregularities precipitated the replacement of the company's CFO and CAO. The accounting issues impact ARCP's reported AFFO due to the manner in which non-controlling interests in earnings (and related shares) was presented in the periods overstating AFFO and understating net losses amounting to adjustments of approximately $23 million. ARCP's access to the debt and equity capital markets is curtailed until the financial inquiry is resolved. Although ARCP stated it is currently in compliance with the financial ratios in its debt covenants, it will be incumbent upon the company to file 3Q14 financials in order to prevent potential covenant breaches for provisions entailing timely submission of financials in its revolver and bond covenants. Furthermore, this purposeful hiding of the accounting error engenders concerns about the company's credibility, internal controls, and maintenance of investor trust.

A return to a stable outlook would reflect the resolution of the accounting issues and timely filing of 3Q14 and YE14 financials by February 2015, in addition to the REIT having the following credit metrics: net debt/EBITDA closer to 6.5x and fixed charge coverage at or above 2x A rating downgrade would likely reflect any missteps in resolving the accounting issue or questions surrounding further deficiencies of internal controls; any unsecured bonds or bank lines covenant compliance issues or resultant legal inquiries; in addition to effective leverage above 60%; net debt/EBITDA over 8x; fixed charge coverage below 2x.

Moody's last rating action for American Realty Capital Properties, Inc. was on October 30, 2014 when Moody's placed the Baa3 senior unsecured rating of ARCP under review for downgrade due to ARCP's announcement that its Audit Committee found accounting discrepancies impacting the reported AFFO and that its 2013 10-K and 1Q14 and 2Q14 10-Qs should no longer be relied upon.

American Realty Capital Properties, Inc. (NASDAQ: ARCP) is a REIT that is engaged in the ownership and acquisition of single-tenant, free standing real estate properties. At June 30, 2014, ARCP owned 3,966 properties in 49 states plus Puerto Rico and Washington, D.C. totaling 106.8 square feet and had total book assets of $21.3 billion and total equity of $10.6 billion.

The principal methodology used in these ratings was the Global Rating Methodology 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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.

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Merrie S. Frankel
VP - Senior Credit Officer
Commercial Real Estate Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nick Levidy
MD - Structured Finance
Commercial Real Estate Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades ARCP unsecured debt to Ba1; negative outlook
No Related Data.
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