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Fitch Affirms Global Logistic Properties at 'BBB+'; Outlook Stable
December 16, 2016 / 7:38 AM / 8 months ago

Fitch Affirms Global Logistic Properties at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 16 (Fitch) Fitch Ratings has affirmed Global Logistic Properties Limited's (GLP) Long-Term Foreign-Currency Issuer Default Rating at 'BBB+' with Stable Outlook. The senior unsecured rating and all outstanding bonds are also affirmed at 'BBB+'. The agency has also affirmed the Singapore dollar-denominated perpetual capital securities issued in December 2011 and January 2012 at 'BBB-'. KEY RATING DRIVERS Leading Logistic Property Owner: GLP's USD38.6bn globally diversified logistic assets at end-September 2016 were located in the US (34%), China (33%), Japan (27%) and Brazil (6%). GLP is the largest logistic asset owner in China, Japan and Brazil. The company also strengthened its foothold in the US, which it entered in 2014, by acquiring USD1.1bn of mature assets in 2016. Fitch believes that GLP will continue to benefit from its large scale and global network as the e-commerce sector expands globally. Improving Recurring Income and Coverage: GLP's larger asset base boosted total management income by 80% to USD130m in the financial year ended 31 March 2016 (FY16). GLP added China CLF II and US Income Partners II in FY16, and Japan Development Venture II and US Income Partners III in FY17. GLP expects to set up an income fund in China in the next two to three quarters. Fitch includes only management fees and dividends from Japan, Brazil and the US in calculating the holding company's recurring income. Cash contribution from China is excluded due to its continued capex, as well as one-off cash repatriation from asset recycling. GLP's holding company recurring income/interest coverage increased to 2.0x at FYE16 from 1.8x FYE15, helped by the addition of management fee income from US Income Partners II since November 2015. Fitch expects the holding company to sustain recurring income/interest coverage above 2x in the next three years, underpinned by increasing recurring income from the US operations. Fluctuating Leverage: Holding-company leverage, as measured by net debt at the holding company level minus net working capital as a ratio of investment in funds, was affected by the US asset acquisitions and increased to 50% at FYE16 from 34% at FYE15. Fitch estimates that leverage has declined to 10% as at end-September 2016 after GLP successfully completed its US Income Partners II syndication and paid off CNY2.65bn in debt. Fitch expects GLP's holding-company leverage to continue to fluctuate but remain below 50% during the company's expansion phase. Operating Portfolios' Financials Stable: GLP's subsidiaries in China and Japan continued to have strong financial profiles, with recurring EBITDA/interest coverage ratios at 7.5x and 18.3x respectively at FYE16. Rental yields in China and Japan are both around 6% while loan-to-value ratios are 11% and 44%, respectively. GLP's asset management platforms in Japan, Brazil and US are jointly controlled entities (JCEs). The loan-to-value ratios of its JCEs (on pro-rata basis) increased to 46.2% at FYE16 from 45.5% in FYE15. The Japan and US funds continued to have higher leverage of 50%-60%, as they benefit from a lower interest rate and more mature industrial property markets. However, we do not expect leverage in these two regions to rise above 50% as GLP intends to maintain its stake in the US assets at below 15%. Limited FX, Interest Rate Impact: Fitch believes increases in interest rates by the US Federal Reserve will not affect GLP because the company has locked up its interest rates for 10 years. An inflationary environment is likely to help improve GLP's rental reversion and push up its property value. Debt held at its operating subsidiaries in China and Japan are naturally hedged by cash flows from local operations and 67% of GLP's total debt carry fixed rates as of 1HFY17. Expansion Caps Rating: GLP's rating continued to be constrained by the risks inherent in its fast expansion strategy, which involves new project development. Furthermore, GLP's financial profile is weaker than the typical 'A'-rated investment property company that has a fairly stable income stream and low leverage ratio. Acquisitions will exert temporary pressure on GLP's leverage from time to time, but GLP's consistent track record in attracting capital partners to participate in its acquisitions will continue to support its asset management platform expansion and avoid a sustained increase in leverage from the current level. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Annual revenue growth of 10% for next three years - Capex/revenue at around 150% for next three years - All announced transactions used in our financial analysis - No future acquisitions RATING SENSITIVITIES Fitch does not expect positive rating action until GLP's portfolio stabilises. Future developments that may individually or collectively, lead to negative rating action include: - Holding company recurring income/interest coverage falls below 2x on a sustained basis (FYE16:2.0x) - Holding company net debt minus net working capital/investment in funds above 50% on a sustained basis (FYE16: 49.6%) - Significant increase in leverage at its operating subsidiaries and jointly controlled entities (JCEs) on pro-rata basis. That is, JCEs' debt/total property assets exceeds 50% on a sustained basis, or debt/ total property assets in each country exceeds 50% on a sustained basis (FYE16: China subsidiary: 11%, Japan subsidiary: 44%, JCEs pro-rata: 46.2%) - Significant deterioration in the recurring income interest coverage at its operating subsidiaries and JCEs (on pro-rata basis). That is, JCE's recurring EBIT/interest at less than 2x on a sustained basis, or EBITDA/interest in each country segment at less than 2x on a sustained basis (FY16: JCEs pro-rata 2.3x) The full list of rating actions is as follows: Global Logistic Properties Limited - Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable - Senior unsecured rating affirmed at 'BBB+' - CNY350m 4% senior unsecured notes due 2018 affirmed at 'BBB+' - JPY15bn 2.7% senior unsecured notes due 2027 affirmed at 'BBB+' - USD1bn 3.875% senior unsecured notes due 2025 affirmed at 'BBB+' - SGD750m 5.5% perpetual capital securities notes affirmed at 'BBB-' Contact: Primary Analyst Vicki Shen Director + 852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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