25 February 2017
Fitch Ratings-London-24 February 2017: Fitch Ratings has assigned UAE based Majid Al Futtaim Holding LLC’s (MAF) proposed benchmark size subordinated perpetual hybrid notes a rating of ‘BB+(EXP)’. The proposed securities qualify for 50% equity credit. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation reviewed.
The hybrid note proceeds will be used for general corporate purposes and to co-finance capex. The note’s rating and assignment of equity credit are based on Fitch’s hybrid methodology, dated 29 February 2016 (‘Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis’ at www.fitchratings.com
KEY RATING DRIVERS
Ratings Reflect Deep Subordination: The proposed notes are rated two notches below MAF’s Long-Term Issuer Default Rating (IDR: BBB/Stable) given their coupon deferral and deep subordination, which result in higher non-performance and lower recovery prospects in a liquidation or bankruptcy scenario relative to the senior obligations. The proposed notes are to be issued on a subordinated basis by MAF Global Securities Limited, constituted by a trust deed, made between the issuer, MAF and Majid Al Futtaim Properties LLC (MAFP)(MAF and MAFP each being the guarantor). The proposed notes will rank pari passu among themselves and are junior to MAF’s senior securities.
Equity-Like Features: The proposed securities qualify for 50% equity credit as they meet Fitch’s criteria with regard to deep subordination, full discretion to defer coupons for at least five years, limited events of default and permanence. These are key equity-like characteristics, affording MAF greater financial flexibility. Equity credit is limited to 50% given the cumulative interest coupon, a feature considered more debt-like in nature. In assessing the flexibility of the capital structure, Fitch calculates that the total hybrid (i.e. 100% of hybrid notes) capital-to-total debt without equity credit will approximately range between 25% and 30% after the transaction.
Permanence: Fitch assumes that the new hybrid issuance will be a permanent part of the group’s capital structure, as the notes’ documentation contains non-binding replacement language and management is committed to hybrid capital. The latter offsets concerns about a carve-out in the language that states replacement intent does not exist if the issuer is comfortable that MAF’s ratings will not fall below ‘BBB’.
Effective Maturity Date: The notes are perpetual with no fixed maturity and the earliest call date is 2022 (Perp-NC5.5). The interest step-ups will be 25 bps in year 10.5 and additional 75 bps 20 years after the first call date, as the reset interest rate will be the same as the fixed rate at issuance. The aggregate step-ups are therefore within Fitch’s aggregate threshold rate of 100bps.
Cumulative Coupon Limits Equity Treatment: The notes have a fixed coupon and will reset for the relevant swap rate after the initial non-call period. The non-call period is five and a half years from the issue date. The hybrid documentation has no look back provision and coupon payments can optionally be deferred at MAF’s discretion, for at least five years, on a cumulative and compounding basis. This entitles the instrument to 50% equity credit. MAF will be obliged to settle deferred coupon payments under several circumstances, including dividend payment.
Capital Structure Diversification: MAF has a diverse capital structure with a mix of international bonds, sukuk and hybrid issuance, reducing the issuer’s funding risk. The hybrid instruments are an integral part of the capital structure of the issuer and support its diversification. Under the hybrid documentation, the issuer has set out its intention to replace repurchased or redeemed hybrids with similar instruments, which is compatible with Fitch’s interpretation of permanence. However, a high portion of hybrid issuance in the capital may restrict the issuer’s ability to raise further equity and would potentially encourage the company to refinance hybrids with senior debt.
MAF’s rating of ‘BBB’ is well-positioned relative to peers, notably on property portfolio KPIs and leverage metrics, yet profitability is lower than major EMEA property and real estate peers’. MAF’s operating environment is higher-risk than European peers’. No country-ceiling, parent/subsidiary or operating environment aspects impact the ratings.
Fitch’s key assumptions within the rating case for MAF include:
– Stable occupancy levels for shopping malls despite less favourable market sentiment;
– Drop in revenues and earnings in the hospitality segment;
– Increased debt issuance for 2017/18 to finance capex and higher interest cost;
– Overall stable profitability metrics in line with previous year’s.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
– MAFP’s recurring income EBITDA interest cover sustained above 3.0x and derived loan to value below 40%;
– Meaningful geographical diversification or reduced asset concentration.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
– Significant downturn in the markets in which MAF operates and higher-than-expected capex, leading to material falls in MAFP’s recurring income EBITDA interest cover below 1.5x over a sustained period
Sufficient Liquidity: Debt maturity profile is 4.7 years with no significant scheduled maturities till 3Q18, when the USD500m hybrid’s first call date falls (October). The company is expecting to keep the hybrid debt in its capital structure or alternatively replace with a new hybrid. Ample liquidity cover exceeds 18 months, supported by available undrawn facilities of over USD2.9bn. Secured debt continued to constitute 13% of total drawn debt as at end-2016 (vs. 14% in end-2015 and 46% in end-2011), mainly resulting from project finance facilities.
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