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Fitch Affirms PSP's Senior Unsecured Rating at 'A-'
June 15, 2017 / 3:55 PM / a month ago

Fitch Affirms PSP's Senior Unsecured Rating at 'A-'

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(The following statement was released by the rating agency) FRANKFURT/LONDON, June 15 (Fitch) Fitch Ratings has affirmed PSP Swiss Property AG's (PSP) senior unsecured rating at 'A-' and Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. The Short-Term IDR has been affirmed at 'F2'. The affirmation reflects Fitch's expectation that the recent modest increase in PSP's net debt/EBITDA will reverse as new investments and refurbishments start to generate yield. PSP's strong balance sheet, low CHF funding costs, recurring rental income from a portfolio of prime, unencumbered, commercial properties, good tenant profile and exposure to the strong Swiss economy. Fitch expects the group to maintain a strong financial profile despite prevailing weak rental demand for Swiss commercial properties. We view as credit-positive management's strategies of focusing acquisitions on renovation and modernisation in a yield-compressed environment and of abstaining from leveraging the balance sheet on valuation gains. KEY RATING DRIVERS Challenging Rental Markets: Fitch expects Swiss office rents (62% of total rents in 2016) to remain subdued in 2017. Supply continues to outstrip demand, especially in peripheral regions and Geneva. However, PSP's portfolio primarily comprises high-quality properties in prime locations that are generally more resilient and PSP has a track record of exceeding Fitch's estimates. Rents in the Swiss retail sector (17% of total rents in 2016) are also under pressure from growing online shopping and shopping tourism abroad that are exacerbated by a strong Swiss franc. Strategic Acquisition: Leverage increased slightly in 2016 after the CHF145 million acquisition of a property in Zurich West. The acquisition is in line with PSP's long-term investment strategy to grow its footprint in the area. PSP's prudent acquisition strategy, focusing on yield increase through renovation and modernisation helps support the ratings. Growing Development Activities: PSP's committed development exposure was moderate at CHF46 million (less than 1% of investment portfolio) at end-1Q17, although the potential programme amounts to CHF484 million until 2022 (less than 10% of investment portfolio). This is well below our rating guidance of 15%. Fitch expects total development capex to grow to more than CHF130 million in 2018 from CHF110 million in 2016. As a result, we expect net debt/EBITDA to peak at 9.7x in 2018, slightly above our guidance of 9.5x, and to reduce thereafter to a level commensurate with the ratings, driven by new leases after completion of these projects. Unabated Investor Demand: Strong valuations for prime commercial property in Switzerland support PSP's financial flexibility. PSP can dispose of assets at healthy multiples, or use its additional debt-raising capacity to support its investment programme. The current low interest rate environment and strengthening Swiss economy attract capital into prime commercial properties in Switzerland (AAA/Stable). We expect yields on PSP's assets to remain low. Uncertainties from ongoing immigration reform, growing unemployment and weaker retail sales in Switzerland may hamper the Swiss commercial rent market in the medium term. 'A'-category LTV: Fitch expects loan-to-value ratio (LTV; net debt/portfolio value excluding development property) to remain commensurate with PSP's ratings, as it comfortably maps to the 'A' category in our Ratings Navigator for EMEA real estate and property companies. Fitch forecasts LTV to remain stable despite the group's development programme, partially mitigated by disposals. Strong Debt Serviceability: PSP's low funding cost support the ratings. EBITDA net interest cover increased to 7.9x in 2016 from 6.7x in 2015. This is comfortably above our downgrade guideline of 2.5x. We expect debt serviceability to remain strong, as all-in costs of new bonds were only 0.3% in 2016. Senior Unsecured Uplift: PSP's senior unsecured rating benefits from a one-notch uplift to the IDR, as the majority of PSP's portfolio comprises investment properties in Switzerland, which is an established market with depth, transparency and liquidity, even in poor market conditions. Its properties are also standalone assets that are valued on a regular basis and fulfil all criteria for a senior unsecured uplift according to Fitch's Recovery Ratings and Nothing Criteria for Equity REITs. Limited Geographic Diversification: The ratings are constrained by the group's focus on Swiss properties and the size of the Swiss property market, which is small by European standards. The ratings also incorporate a fairly short-term lease structure in Switzerland, which is usually five years plus a tenant extension option for another five years compared with seven-to-eight years for offices in the UK. This is partially mitigated by the group's high-quality tenants, moderate tenant concentration and high tenant industry diversification. DERIVATION SUMMARY PSP's rating is underpinned by a strong financial profile and a high-quality office property portfolio. Its concentrated portfolio provides less diversification than higher-rated Unibail-Rodamco SE (A/Stable), and similarly rated Segro PLC (BBB+/Stable). PSP rent levels have remained nearly flat, compared with continued like-for-like rental growth for both Unibail and Segro; Rental dynamics in its markets are less favourable. PSP's good access to capital markets and low funding costs support a very strong interest cover ratio. This is partly offset by a shorter debt maturity profile and shorter lease duration than similarly rated peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 2% rent reduction on lease renewals due to oversupply in key office and retail markets. - Moderate capex, net of disposals, to peak in 2018 and to average around CHF50 million thereafter. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Material diversification of portfolio geographically or by sector, accompanied by financial metrics being maintained, notably LTV below 40% through the cycle. This would lead to an upgrade. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - An increase in rent arrears, tenant defaults, resulting in EBITDA net interest cover falling below 2.5x. - Material committed development spending rising above 15% of the portfolio (2016: less than 1%). - LTV above 40% (2016: 34%) and net debt-to-EBITDA above 9.5x (2016: 9.4x) on a sustained basis LIQUIDITY Comfortable Liquidity: PSP's liquidity is comfortable, comprising CHF670 million of undrawn credit facilities and CHF21 million in cash at end-2016, compared with no maturing debt in the next two years and limited committed capex. In addition, the group will have access to CHF100 million in cash deposits that will become available in 2018. PSP has had unimpaired access to both local Swiss banks and the bond market throughout the financial crisis, which Fitch expects will continue. Contact: Supervisory Analyst Ha-Anh Bui Director +49 69 768 076 126 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Principal Analyst Fredric Liljestrand Associate Director +44 20 3530 1285 Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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