(The following statement was released by the rating agency)
-- We are assigning our 'BBB-' issue rating to Prologis European Properties Fund II FCP (PEPF II)'s proposed $300 million senior unsecured notes to be issued through its financing vehicle Prologis International Funding II S.A.
-- The 'BBB-' issue rating on the proposed notes is one notch lower than the 'BBB' long-term rating on PEPF II, to reflect our view of the notes' structural subordination to PEPF's existing secured obligations.
Rating Action On Oct. 12, 2012, Standard & Poor's Ratings Services assigned its 'BBB-' rating to the proposed $300 million senior unsecured notes to be issued by Luxemburg property company Prologis European Properties Fund II FCP (PEPF II) through its dedicated financing vehicle Prologis International Funding II S.A. The 'BBB' long-term corporate credit rating on PEPF II remains unchanged.
The issue rating is one-notch below our 'BBB' long-term rating on PEPF II, to incorporate our view of the structural subordination of the proposed notes to PEPF II's existing secured obligations. We take into account PEPF II's planned repayment of About EUR195 million of its 2013 secured debt maturities with the proceeds from the proposed notes.
To evaluate the proposed notes' structural subordination, we applied our general corporate criteria and our key credit factors for the real estate sector. The rating outcome is the same, irrespective of which approach is used.
-- Under our general corporate criteria, we estimate that PEPF II's ratio of priority liabilities to total assets will be about 30% after issue of the proposed notes and concomitant to secured debt repayments, versus 36.7% on June 30, 2012. The threshold for notching is reached when more senior claims cover more than 20% of the assets (see "Corporate Ratings Criteria 2008," published April 15, 2008, on RatingsDirect on the Global Credit Portal).
-- Using the credit factors we view as key in the real estate sector, we estimate that PEPF II's ratio of net operating income generated by encumbered assets to total net operating income will be 57.7% after the notes issue and concomitant to secured debt repayments, compared with 68.8% currently. Where the percentage exceeds 50%, we typically rate senior unsecured debt issues one notch below the corporate credit rating (see "Key Credit Factors: Global Criteria For Rating Real Estate Companies," published June 21, 2011).
PEPF II's assets are located in many jurisdictions in Europe, which we believe would further complicate access to residual asset value for unsecured creditors. That said, we view the EUR1.3 billion in assets which are to remain unencumbered as slightly more liquid than the encumbered assets, because most of the unencumbered assets are located in the U.K., Poland, France, and Germany, where the logistics property markets are deeper and more dynamic than in other European countries.
We could review our rating on the proposed notes, once PEPF II has progressed with the shift in its funding strategy toward higher usage of unsecured debt. Under our base-case scenario, however, we don't expect the strategic change to advance significantly over the next 6-12 months, especially given the continuing volatile conditions in debt capital markets.
The long-term rating on PEPF II continues to reflect our view of the company's "satisfactory" business risk profile and an "intermediate" financial risk profile, as our criteria define the terms.
The satisfactory business risk profile is underpinned by PEPF II's large pan-European portfolio of prime, recently-built logistics properties, the strong cash flow generated by these assets, an occupancy ratio of 95%, and high average lease duration of 4.8 years to the next break option. We also view its lack of exposure to speculative development risk as credit positive. These strengths are partly offset by the fund's still substantial share of secured debt as a proportion of total debt, which, in our view, currently limits the fund's current financial flexibility and which will likely decrease after the proposed notes issue. PEPF II is also exposed to currently fragile demand in the European industrial property market, and to some volatility inherent in the real estate sector.
We classify PEPF II's liquidity as "adequate" under our criteria. We expect liquidity sources to meet funding needs by more than 1.2x in the next 12 months.
We estimate the main liquidity sources over the next 12 months, as of July 31, 2012, at about EUR415 million including:
-- EUR28 million of committed asset sales; -- EUR58 million in cash and short-term investments;
-- Sufficient availability under committed credit lines of revolving credit to cover the debt maturities over the same period; and
-- Sufficient incoming FFO to more than cover planned dividends and capital expenditures (capex).
Over the same period, we estimate the main liquidity uses at about EUR275 million including:
-- Debt maturities; -- Planned dividends; and -- Capital expenditure (capex).
We note a strong deterioration in average debt durations, which fell to 2.7 years on June 30, 2012, from 3.9 years on Dec. 31, 2010. This was owing to the absence of large refinancing over the past 12 months. That said, PEPF II is now looking at a range of funding options for extending its debt maturity profile, based on the step up in the fund's asset and income base over the past few years. PEPF II also has a significant unencumbered asset base as a back-up option for raising secured finance and we believe its proposed $300 million bond issue should improve its liquidity position.
Related Criteria And Research
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating
Prologis International Funding II S.A
Proposed Senior Unsecured* BBB-
*Guaranteed by Prologis European Properties Fund II FCP
(Caryn Trokie, New York Ratings Unit)