The FINANCIAL -- London-05 August 2011: Fitch ratings has affirmed The British Land
Company Plc's (British Land) senior unsecured rating at 'A-' and the
company's Long-term Issuer Default Rating (IDR) at 'BBB+'.
The agency has simultaneously affirmed British Land's Short-term IDR at 'F2'. The Outlook on the Long-term IDR remains Stable.
"British Land maintained strong financial metrics in FY11 and Q1 FY12 due to its active asset management, despite the challenging UK retail property environment," says Jean-Pierre Husband, a Director in Fitch's EMEA Corporate Finance team. " Its liquidity position remains one of the strongest in the EMEA REIT sector."
The ratings reflect the step-change in metrics in the financial year ending March 2010 (FY10) which was maintained in FY11 and Q1 FY12. Fitch-adjusted EBIT/net interest cover (NIC) equalled 100.0x at March 2011 (versus 12.6x for FY10) on a deconsolidated basis, and 3.6x (versus 2.4x) on a consolidated basis. Fitch expects the deconsolidated NIC (including dividends from JV and secured assets) to remain above 3.0x and the consolidated EBIT NIC remain above 2.0x over the next three years, despite bolt-on acquisitions and renewed property development (GBP740m of committed capex at FYE11). The company's current ratings could also come under pressure if the de-consolidated unencumbered asset cover fell below 2.0x. Positive factors for the ratings would include de-consolidated NIC above 3.5x, consolidated NIC above 3.0x and de-consolidated leverage below 40%, all on a sustained basis.
As Fitch has previously noted, British Land's rating criteria is based primarily, but not solely, on the credit metrics derived by de-consolidating the unsecured assets (unsecured property GBP1.9bn at FY11). The resulting de-consolidated EBIT/NIC is relatively volatile as the unsecured asset component of the business has been used as a warehousing mechanism for the rest of the group and hence its financial structure can change quickly. Therefore, Fitch also takes the consolidated group NIC and leverage ratios into consideration in assessing the company's ratings. Further upward movement of the ratings will be limited by the current funding strategy and structure of the group, as unencumbered debt financing is used to warehouse assets before refinancing with long-term secured debt. Fitch notes that assets have recently been released from the debenture security pool and a long-term unsecured US private placement signed.
The group's financial structure has been bolstered by further property asset disposals in FY11, (GBP68m of asset disposals) and repayment of inter-company loans (GBP220m) from the now deconsolidated Broadgate Estate, a 50/50 JV with Blackstone. Fitch-adjusted group leverage was down to 35% at June 2011 (35% at 31 March 2011).
Fitch also factors potential contingent liabilities for unsecured creditors into British Land's ratings. For example, securitisations and JVs are legally non-recourse to the rated entity, there is a possibility the company may decide to support these financings should covenants come under pressure within the individual non-recourse structures. However, in FY11 and Q1 FY12, British Land's property portfolio saw valuation increases (6.9% and 1.5%, respectively) and Fitch believes there is currently no requirement for the company to top-up debentures and the Meadowhall, Broadgate and BL Superstores securitisations representing 60% of JV debt do not have LTV covenants.
The ratings also reflect the company's strong lease profile (average 11.5 years to first break) which is above average for the sector, and excellent tenant profile, which gives sound defensive qualities in a property downturn. The ratings also take into account BL's more activist asset management, building on its long-term relationships with prime tenants and its concentration on markets where the group has a competitive advantage, such as large out-of-town retail parks. As a result, UK occupancy remains high at 98.7% at June 2011, with over 91.8% (102% including contracted increases from rent free expiries and fixed uplifts) of rents still contracted in three year's time. Tenant defaults remain low, with only 0.5% of rents from tenants under administration as of 30 June 2011.
British Land has a strong liquidity position, with undrawn committed facilities and cash totalling GBP2.6bn at FYE11. Post FYE11 the company signed a GBP560m bank facility and USD480m of private placements. Against this, it has committed development capex of GBP740m and GBP319m of debt maturing in FY12. 91% of debt was at fixed or capped rates at March 2011. BL's net unsecured borrowings to unencumbered assets ratio of 25% at 30 June 2011 compares favourably with the group's financial covenant of unsecured debt/unencumbered properties at a maximum of 70%.
British Land is a major UK-based real estate investment trust (REIT) which has portfolios in the UK and Spain with a value of GBP9.9bn at June 2011.
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