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Rating Action:

Moody's downgrades Unibail Rodamco Westfield ratings; stable outlook

16 Sep 2020

Frankfurt am Main, September 16, 2020 -- Moody's Investors Service (Moody's) has today downgraded Unibail-Rodamco-Westfield SE's (URW) long-term ratings to Baa1 from A3, its backed junior subordinated debt to Baa3 from Baa2. The outlook was changed to stable from negative.

"The downgrade to Baa1 reflects increased leverage expectations and the weaker operating outlook for the company and the broader retail real estate sector" says Oliver Schmitt, a VP-Senior Credit Officer and lead analyst for URW. "The combined effect of the announced capital measures, expected disposals proceeds and CAPEX spending together with our view on future earnings and value declines, will position URW's rating solidly in the Baa1 rating category, despite uncertainty around the demand for retail properties".

A full list of all affected ratings can be found at the end of this press release.

RATINGS RATIONALE

On 16 September, as part of its €9bn+ RESET plan, URW has announced several measures aimed at strengthening its balance sheet and increasing its financial flexibility [1]. The measures include a fully underwritten capital raise of €3.5 billion, a reduction of € 1 billion of cash outflow for dividends in the next two years, further €800 million reductions to its CAPEX plans, and a further acceleration of its property disposal plans.

The company acts to restore its balance sheet strength at a time when the operating environment has likely changed sustainably for retail real estate landlords. Both tenants and consumers are in a worse position than prior to the pandemic outbreak, and the trend towards online shopping has accelerated. Investor preference also further moves away from retail assets towards other asset types.

Operationally, retail shopping is still restricted compared to pre-COVID through some stores/restaurants/leisure activities being closed, consumers being less comfortable with traveling towards retail centers with public transport, and the retail experience in the center being framed by social distancing rules and wearing of masks. Within this context, some of the performance indicators such as footfall and retail sales in Continental Europe look encouraging, while the UK data shows substantially more weakness. The company did not disclose performance updates on the US portfolio which we expect to perform weaker given longer / still existing restrictions.

We expect some moderate increase in vacancy and a moderating decline in rents (excluding the impact of bad debt) in the next 18 months, but we are also mindful that the long lease profile will - outside of insolvencies - result in a more gradual impact of weaker tenant demand on earnings. At the same time, in particular 2020 and 2021 EBITDA will be lower because of increasing writedowns of receivables and the accounting impact of concessions. We do expect these effects to be more one-off and not continue on a larger scale in 2022 and beyond. Including the impact of property disposals, our central rating scenario assumes total EBITDA to decline by around 20% compared to 2019 within the next 12 to 18 months.

There is execution risk around the disposals plan which is critical to the overall deleveraging plan. We think that the quality of URW assets will continue to attract buyers, but the general interest in retail is certainly in decline and pricing as well as timing of the disposals is uncertain. We have included moderate discount expectations for property disposals in our projections, but our ratings give credit to the disposal plan. URW has a good track record of disposing assets at or above book value, which we believe also increases the chance of successful disposals in a more difficult environment, also noting that around €1 billion being considered at an advanced stage by the company.

The ratings also reflect scenarios of property value declines of up to 20% from 2019 to 2021. We believe that earnings capacity will be the main driver for changes in property values, while yield shifts will be more moderate. We are also still of the view that prime properties such as URW's assets will hold up better than non-prime properties, despite the fact that dominant schemes with a larger leisure and restaurant offering especially in central, public transport related areas may recover slower than more local schemes. However, looking through the near-term period with restricting rules around shopping, high footfall and sales areas will still be the best locations for retailers to have stores in.

Earnings-related financial metrics will look weak in 2020 as a consequence of bad debt and concession impact, but we perceive 2021 and beyond financial metrics to be more relevant for the positioning of the rating. The same is however also true for Moody's-adjusted debt/assets, which we anticipate will be under further pressure into 2021 from expected property value declines. We expect Moody's-adjusted debt/gross assets to remain below 50% by 2021, but we are mindful that it will take some time before large cash proceeds will pay down debt. We also expect net debt/EBITDA to be below 11x in 2021.

RATIONALE FOR STABLE OUTLOOK

Despite uncertainties of execution of the asset disposal plan and in the level of operational performance after the pandemic, the actions announced by URW create an element of buffer to underperformance of its plan that positions the rating solidly in the Baa1 category.

LIQUIDITY

URW retains a very solid liquidity position. In addition to €3.5 billion of cash on balance sheet as of June 2020, the company had access to more than €9 billion of undrawn credit facilities. Even excluding the further €3.5 billion expected proceeds from the equity raise, available liquidity exceeds all cash outflows including CAPEX and dividends in 2020 and 2021. The equity raise will also increase the buffer under its financial covenants, which we estimate represented a 30% value decline buffer to typical covenants based on H1 results prior to the capital measures announced.

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

An upgrade would require URW to return to a solid operating performance similar to the pre-COVID-19 era as evidenced through footfall, tenant sales growth, occupancy and rental growth. Positive pressure on ratings can stem from Moody's-adjusted debt/assets remaining below 45%, net debt/EBITDA sustained below 10x, and interest cover remaining above 3.5x.

We expect the announced capital measures to be executed, hence failure to do so would put pressure on the existing ratings. Rating pressure can also stem from larger than anticipated pressure on operating performance through retailer distress or lack of consumer spending in malls. Other factors that could lead to a downgrade include Moody's-adjusted debt/asset failing to reduce below 50%, net debt/EBITDA fails to remain below 12x, or fixed charge cover sustains below 3.25x in 2021.

LIST OF AFFECTED RATINGS:

..Issuer: Unibail-Rodamco-Westfield SE

Downgrades:

.... LT Issuer Rating, Downgraded to Baa1 from A3

....BACKED Junior Subordinate Regular Bond/Debenture, Downgraded to Baa3 from Baa2

....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Rodamco Sverige AB

Downgrades:

....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

Outlook Actions:

....No Outlook

..Issuer: WEA Finance LLC

Downgrades:

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: WFD Trust

Downgrades:

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

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.

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_1133569.

REFERENCES/CITATIONS

[1] Company announcement 16-Sep-2020

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.

Oliver Schmitt
VP - Senior Credit Officer
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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