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Rating Action:

Moody's upgrades O1 Properties' CFR to Caa2; stable outlook

18 Feb 2021

London, 18 February 2021 -- Moody's Investors Service ("Moody's") has today upgraded O1 Properties Limited's (O1) corporate family rating (CFR) to Caa2 from Caa3 and the senior unsecured ratings of instruments issued by O1 Properties Finance Plc and O1 Properties Finance JSC, which are subsidiaries of O1, to Ca from C. Concurrently, Moody's has withdrawn O1's C-PD/LD probability of default rating (PDR) because this rating is no longer applicable under the relevant methodology. The outlook on all entities remains stable.

RATINGS RATIONALE

The upgrade of the ratings reflects the completion by O1 of a restructuring of roughly 45% of its unsecured debt (12% of total debt), which materially extends its maturity thereby alleviating its otherwise high refinancing risk, decreases interest payments and modestly reduces debt burden. The rating action also factors in Moody's recovery expectations for all of the company's debt obligations, supported by the good quality of its assets. At the same time, the rating takes into account O1's weak credit metrics and liquidity, unsustainable capital structure and a fragile state of the real estate market.

In January 2021, O1 completed the restructuring of the $350 million global notes originally due September 2021, following two interest non-payments in 2020. The maturity of the notes was extended to September 2028, the interest rate was reduced to 0.5% a year from 8.25% and all payments were capped at 58 US dollar/rouble exchange rate. In October 2020, the company also restructured its domestic rouble bond with the outstanding amount of $29 million, extending its maturity to September 2024 from October 2020 and reducing the cash interest rate to 6% from 13%. Moody's considers both transactions distressed exchanges, which is a default under the rating agency's definition.

The debt restructuring reduces O1's refinancing risks in the near term. Apart from interest payments, O1 will only face repayments on its secured debt in 2021-23. However, as its internal cash sources will not be sufficient to meet these debt maturities, O1 will have to resort to refinancing. This could be feasible given the secured nature of this debt, with a pledge over the company's high class yielding office properties, and a strong track record of refinancing of such type of debt in 2018-20. However, refinancing of the domestic unsecured bonds due 2024 and 2026 is highly uncertain and represents a high risk of default or distressed exchange.

The coronavirus pandemic hurt the Russian office real estate market through social-distancing measures, including lockdowns and remote working arrangements, and the decrease in tenants' revenue due to an economic downturn. As a result, a number of tenants requested payment deferrals, discounts or revision of lease terms. However, the Moscow class A office market has been relatively resilient thanks to the low construction activity curbing new supply and the finite offering of high-quality spaces, and rebounded to the pre-pandemic conditions by year-end 2020. At the same time, the investment market remains lacklustre, with few large transactions and low investment appetite amid heightened economic and political risks, which exerts pressure on the value of properties.

Moody's estimates O1's revenue on a cash basis to drop by 20% to $225 million in 2020 from $280 million in 2019 due to a 10% depreciation of the rouble and a 10% fall in rental collections. As a result, the company's cash flow generation in 2020 was barely sufficient to cover its essential cash needs and some interest expenses but not all. Although the revenue is likely to stabilise in 2021 close to the level of 2019 in rouble terms, O1's cash flow will remain under pressure in 2021 because of the deferred debt amortisations and interest payments from 2020. The company's free cash flow may stabilise at around $30 million-$50 million starting 2022.

The rating factors in the company's highly leveraged credit profile. Moody's estimates its adjusted debt/gross assets ratio at around 95% in 2020, compared with 90% in 2019 and 84% in 2018, which will remain at this high level for the next two years. O1's net debt/EBITDA will be high at around 14.0x-16.0x in 2021-22. On the positive side, fixed charge coverage metric (measured as adjusted EBITDA/interest expense) should improve to around 1.2x-1.5x in 2020-22 from 0.7x-1.2x in 2017-19 thanks to completed debt refinancing and restructuring.

O1's liquidity will be weak over the next 18 months. Although the company' cash balance and cash generation should be sufficient to cover its operating needs and cash interest payments, O1 will not have sufficient internal cash sources to redeem debt maturities starting from the second half of 2021 and will need to refinance them.

O1's CFR of Caa2 also reflects Moody's expectation of a family recovery rate of above 65% for all of the company's debt obligations, in a default, restructuring or liquidation scenario -- although the rating agency considers this is not imminent given the completed restructuring - supported by the good quality of its assets. At the same time, the Ca senior unsecured rating incorporates Moody's expectation that the recovery for the unsecured instruments issued by O1 Properties Finance Plc and O1 Properties Finance JSC will be low, given the high share of secured debt in the company's debt structure. In addition, there is significant uncertainty regarding the timing and the actual recovery rate in a default or restructuring scenario, which may vary depending on the prevailing market conditions at that time, the company's cash flow generation ability and relationship with creditors.

Moody's has decided to withdraw the rating for its own business reasons. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

The rapid spread of the coronavirus pandemic, deteriorated global economic environment, a sharp decline in oil prices, and high asset price volatility created an unprecedented credit shock across a range of sectors and regions. The real estate sector was one of the sectors significantly affected by the shock, given its sensitivity to consumer demand and sentiment. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.

The rating also takes into account the governance risks which are mostly related to the low level of transparency at the controlling shareholder Riverstretch Trading and Investments (RT&I) and the lack of track record of its strategy, financial policy and corporate governance practice towards O1.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects the recovery assumptions embedded in the current CFR, given the company's high-quality office portfolio in prime locations, and Moody's expectation that the company would be able to refinance the secured debt maturities due 2021-23 and to service all interest payments.

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

A positive pressure on the ratings could develop if O1 were to (1) successfully and timely address its liquidity and refinancing risks, including the unsecured debt maturities due 2024, (2) reduce effective leverage to at least 85%, and (3) maintain sufficient annual rental income to solidly cover its cash obligations related to regular debt service requirements. An upgrade would also require sustainable improvements in the company's balance sheet structure and potential recovery rates for debtholders through an increase in the valuation of the property assets, a reduction in total debt or larger value of unencumbered assets.

Moody's could downgrade the rating if (1) O1 fails to refinance the upcoming debt maturities or the risk of default, including a distressed exchange, increases; (2) its financial performance deteriorates, with annual rental income becoming insufficient to cover basic operating needs and cash interest payments; or (3) the expected recovery rates deteriorate beyond Moody's current expectations embedded in the rating.

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.

O1 Properties Limited is Russia's leading real estate investment company. The company owns a portfolio of 12 yielding assets, with a net rentable area of 478,173 square metres and the reported asset value of $2.7 billion as of 30 June 2020. RT&I, which is ultimately owned by Pavel Vashchenko (90% share) and Valeriy Mikhailov (10%), effectively controls around 70% of O1.

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 EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU 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.

Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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