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Rating Action:

Moody's downgrades Unibail-Rodamco-Westfield to A3 with a negative outlook

27 Mar 2020

Frankfurt am Main, March 27, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded Unibail-Rodamco-Westfield SE's (URW) long-term ratings to A3 from A2, its backed junior subordinated debt to Baa2 from Baa1. The outlook remains negative.

"The downgrade to A3 was triggered by continued elevated leverage that failed to reduce substantially since we changed the rating outlook in April last year" says Oliver Schmitt, a VP-Senior Credit Officer and lead analyst for URW. "The business disruptions caused by the outbreak of the coronavirus in Europe and in the US will impair the ability to delever though property sales and puts substantial pressure on URW's tenant base that will ultimately affect URW's earnings and profitability. The uncertainty around the duration and the severity of the business disruption and the negative impact on URW's cash flows, earnings and property values is reflected in the negative outlook"

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

RATINGS RATIONALE

URWs A3 long-term issuer rating reflects the company's superior scale and portfolio diversity, the high quality of its retail portfolio, and its good while declining operating performance in a difficult operating environment for retail landlords. URW has excellent access to debt capital markets and significant financial flexibility stemming from a high level of unencumbered assets. URW started to sell assets from the second half of 2018 in order to de-lever and fund its future development pipeline, mostly in line or above latest property valuation.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The retail real estate segment has been one of the sectors more affected by the shock given the sensitivity to the retail environment and financial health of retailers. URW has started to close large parts of its shopping centres with non-essential businesses and shops in line with government authorities requirements. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

URW's operating environment has deteriorated strongly with the business interruption caused by the coronavirus outbreak, and will likely be sustainably weaker even after the immediate disruption has ceased. A large number of retailers will face acute liquidity and solvency challenges. While governments around the world have announced measure to support businesses challenged by the coronavirus crisis, we expect that URW will have to provide concessions through extended payment terms all the way to rent reductions to support occupancy. While the business interruptions as such may only last a few weeks, we do expect an increasing number of tenant insolvencies and subdued leasing activity that will result in moderately declining NOI throughout 2020 and 2021. We understand that for the largest part of URW's portfolio, tenants are still obliged to make payments independent of continued operations, but we are mindful that some tenants may challenge the lawfulness of rents in case of centre closures. Governments may also take steps to prevent tenants from liquidity challenges or being evicted from its premises during the corona downtime. As a consequence we expect at least a moderate decline in EBITDA with a high level of uncertainty around the extent of the decline.

The company remains committed to a large sales programme that we think will be much more challenging to achieve in the next 12 months, highly dependent on how long and how strongly the outbreak of the virus changes the mid-term business environment for retailers and investor appetite for retail properties. We also expect that reduced investor interest will result in declining property values over the next two years, hence we do not expect substantially declining debt/asset ratios. We note that the transition of the weakened investment sentiment may take time to filter through into valuations, but we have assumed valuation declines of at least 10% cumulatively in our scenarios in the next 2 years. Debt/total assets stood at 46.7% at yearend 2019 (around 45% pro-forma for the announced sale of 5 assets to a JV that will push some debt off balance sheet).

The current retail environment will challenge the company's ability to improve its credit metric while still having to fund a sizeable CAPEX pipeline of €1 billion of committed projects and ultimately some part of its further €4.5bn controlled CAPEX spending target. We understand URW will take measures to preserve cash flows, including delaying operating tenant expenditures and other capital spending that is not committed. The company has also announced to cancel its second leg of the 2020 dividends, which will reduce cash outflow by around €750 million.

URW's liquidity position is good. The company has access to €9.2 billion of undrawn revolving credit facilities as of December 2019, while we understand some of these lines have been drawn as a precautionary measure in the meantime. Even assuming concessions on the timing and the amount of rental payments and no access to debt markets for 2020, the company will have plenty of headroom under its credit facilities at year end, with potential further proceeds coming from targeted property sales. While access to capital market debt funding is currently expensive, we expect URW will be able to roll its debt and preserve its liquidity buffer. Our forward view on liquidity would tighten if URW was unable to roll its revolvers and term out its 2020 debt maturities albeit at somewhat higher cost.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects our expectations of a strongly deteriorating operating environment for retailers ultimately impacting even the stronger retail landlords such as URW. The extent of business interruptions and the further impact of continued social distancing on shopping centers is unclear at this point, but the initially intended improvement of credit metrics is unlikely. We could revisit the rating positioning earlier than a typical 12-18 months outlook period if we have more clarity around the length and severity of business disruptions.

FACTORS THAT COULD LEAD TO AN UPGRADE

Given the uncertainties caused by the outbreak of the coronavirus in Europe and in the US, an upgrade is unlikely at this stage. The operating environment for URW has changed substantially and would have to stabilise, with clear visibility on earnings, cash flow and leverage ratios and return to substantially positive like for like rental growth before considering an upgrade. We would also expect to see debt/assets moving below 40% and debt/EBITDA moving below 10x sustainably.

FACTORS THAT COULD LEAD TO A DOWNGRADE

URW's ratings could be downgraded if the business disruptions last longer than during March to May, a high level of retailer distress translates into weakened credit quality and occupancy, URW fails to execute property sales that enable funding of CAPEX and debt repayments, or liquidity weakens. We could also downgrade if we expect debt/asset to be sustained above 45%, or fixed charge cover sustains below 4x.

LIST OF AFFECTED RATINGS

..Issuer: Rodamco Sverige AB

Downgrades:

....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)A3 from (P)A2

..Issuer: Unibail-Rodamco-Westfield SE

Downgrades:

.... LT Issuer Rating, Downgraded to A3 from A2

....BACKED Junior Subordinate Regular Bond/Debenture; Downgraded to Baa2 from Baa1

....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)A3 from (P)A2

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

Outlook Actions:

....Outlook, Remains Negative

..Issuer: WEA Finance LLC

Downgrades:

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

Outlook Actions:

....Outlook, Remains Negative

..Issuer: WFD Trust

Downgrades:

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

Outlook Actions:

....Outlook, Remains Negative

PRINCIPAL METHDOLOGY

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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

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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