February 15, 2017 / 6:00 AM / a year ago

Fitch Affirms Lendlease at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, February 15 (Fitch) Fitch Ratings has affirmed Lendlease Corporation Limited's (Lendlease) Long-Term Issuer Default Rating at 'BBB-'. The Outlook is Stable. Ratings on the senior unsecured debt issued or guaranteed by Lendlease, including debt issued by Lendlease Finance Limited, Lendlease Europe Finance plc and Lendlease (US) Capital, Inc., have also been affirmed. A full listing of rating actions follows at the end of this commentary. The affirmation reflects Fitch's expectation that Lendlease's cash generation and therefore credit metrics will continue to improve while the credit profile continues to benefit from its strong recurring earnings base. KEY RATING DRIVERS Leadership, Diversification, Scale Drive Ratings: Lendlease has a market-leading position in most of its businesses, which include residential and infrastructure development, construction and investment management in Australia, the UK, the US and Asia. Lendlease's scale - with a development pipeline of AUD48.8bn and a construction backlog of AUD20.7bn at the end of the financial year to 30 June 2016 (FYE16) - supports its rating. Lendlease's project portfolio was somewhat concentrated in Sydney. However, as its large Sydney developments, such as Barangaroo South and Darling Harbour Live, are now largely complete, and together with the company's strategy to focus on its global gateway cities, we expect this concentration to decline over the coming years. Nevertheless, we expect Lendlease to have high exposure to the Sydney residential market until at least 2018, as around 39% of its pre-sold apartment revenue at FYE16 is located in Sydney. Cash Generation to Improve: Fitch expects Lendlease's cash generation and credit metrics to continue to improve until FYE19 as Lendlease realises the pre-sold apartment revenue of AUD5.9bn and construction backlog revenue of AUD20.7bn at FYE16. The global trend towards urbanisation, as well as the Australian government's priority of infrastructure spending, continues to underpin future demand for Lendlease's services and should help to offset any negative trend in the Australian property market, which has underpinned Lendlease's growth since 2008. Strong Recurring Earnings: Lendlease's Australian retirement village, US military housing and investment management businesses generate stable and predictable revenue, which underpins the company's credit profile and provide considerable headroom to the rating. In FYE16, these businesses accounted for around AUD399m in EBITDA, and are likely to represent around 30%-40% of EBITDA going forward. This supports our expectation that Lendlease's investment in its development pipeline will remain high as the company seeks to maintain the strength of its order book. Strong Order Book; Earnings Visibility: Lendlease reported a development pipeline of AUD48.8bn at FYE16, construction backlog of AUD20.7bn and funds under management (FUM) of AUD23.6bn. Fitch expects the projects' completion and growing FUM to drive revenue to 2019. It has a pipeline of around 24,000 zoned apartments - around a 17-year supply - and is focusing on urban regeneration projects globally and infrastructure spending in Australia to maintain order-book strength. Long Project Lead Time: Lendlease began a number of apartment and commercial tower projects in 2012, with development inventories increasing to AUD3.7bn at FYE16 from AUD1.9bn at FYE11. Fitch expects Lendlease to realise the value of these projects over the next two to three years as the projects begin to complete, including AUD5.9bn in pre-sold apartment revenue and AUD20.7bn in construction backlog revenue. The mismatch of investment cash outflows and the receipt of cash at project completion is a significant risk. However, Lendlease seeks to manage this risk by several measures, including retaining flexibility around the timing of commencement of the project, obtaining equity partner contributions, forward sales and structuring deals to allow for capital-light on-staging. Reduced Risk of Apartment Settlements: Lendlease reported record pre-sold apartment revenue of AUD5.9bn at FYE16. The company still meets the guidelines for its rating, even after a 10% pre-sales default rate is factored in. Its highest default rate was 13% for a single project immediately following the 2007 global financial crisis. To manage settlement risk exposure, Lendlease developed a Pre-Sold Lendlease Apartment Cash Flows (PLLACes) product, and had reduced risk for around AUD0.6bn of pre-sold apartment revenue at FYE16. DERIVATION SUMMARY Lendlease's rating of 'BBB-/Stable' is driven by its exposure to the cyclical home-building and construction sectors, and the associated cash-flow mismatch between investment outflows and cash receipts on its projects, which typically last longer than one year. This balances the benefit from the company's recurring revenue stream in its investment business, which provides interest coverage of around 3.0x. Lendlease's recurring EBITDA interest coverage is higher than that of peer, Hong Kong-based Nan Fung International Holdings Limited (BBB/Stable). However, Nan Fung has sizeable financial assets and cash that exceed its total debts at FYE16, while Lendlease is in a net debt position and investment in its development pipeline is expected to remain high. Compared with UK homebuilder Taylor Wimpey plc (BBB-/Stable), Lendlease has a more robust revenue stream, which offsets Taylor Wimpey's better profile with its net debt also close to zero. Lendlease's adjusted net cash to operating EBITDAR leverage and recurring EBITDA interest coverage is comparable to those of Australian peer, Downer EDI Limited (BBB/Stable). However, Downer has lower exposure to cyclical cash flows as recurring maintenance-style projects have increased as a proportion of its project portfolio. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Lendlease include: - FUM to increase by around 8% per year in FY17 and FY18, and by around 5% per year in FY19 and FY20 - Investment cash outflows to peak in FY17 as Lendlease completes its current portfolio of major projects - Investment in land bank to recommence in FY18 - Dividend payout ratio to be at the higher end of 40%-60% of net profit after tax guidance RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - Recurring EBITDA (defined as EBITDA from the Investments segment per Lendlease's financial reports) to gross interest expense increases to above 3.0x (FY16: 3.0x), on a sustained basis. - Adjusted net debt to operating EBITDAR falls below 2.5x (FY16: 1.8x), on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: - Recurring EBITDA to gross interest expense falls below 1.5x, on a sustained basis. - Adjusted net debt to operating EBITDAR increases to above 4.0x, on a sustained basis. LIQUIDITY Capital Market Access: Lendlease has capital market issuance in each region it operates, with debt denominated in Australian dollars, British pounds, US dollars and Singapore dollars outstanding at FYE16. Lendlease also had undrawn syndicated credit facilities of AUD1.5bn (with AUD600m available until June 2019 and AUD900m available until June 2020) and a GBP400m club bank facility available until March 2021, drawn to GBP100m, at FYE16. Strong Liquidity Profile: Lendlease is entering its cash generation phase as it settles its pre-sold residential units and completes its construction backlog. In Fitch's view, these inflows, along with current cash reserves, undrawn facilities and capital market access, will be sufficient to cover capex, investments in its development pipeline, dividends and debt maturities over the rating horizon, without breaching the negative rating sensitivities. FULL LIST OF RATING ACTIONS Lendlease Corporation Limited -- Long-Term Issuer Default Rating affirmed at 'BBB-'; Outlook Stable -- Senior unsecured debt rating affirmed at 'BBB-' Lendlease Finance Limited -- Senior unsecured debt affirmed at 'BBB-' Lendlease Europe Finance plc -- Senior unsecured debt affirmed at 'BBB-'. Lendlease (US) Capital, Inc. -- Senior unsecured debt affirmed at 'BBB-' Contact: Primary Analyst Kelly Amato, CFA Associate Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney, NSW, 2000, Australia Secondary Analyst Vicky Melbourne Senior Director +61 2 8256 0325 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019002 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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