Listed property heavyweight Cromwell is facing a potential credit rating downgrade from Moody’s over its high level of debt relative to its earnings.
The commercial property trust, which is seeking to raise almost $2 billion to back the listing of a European real estate investment trust on the Singapore Stock Exchange, currently has a Baa3 rating, which is at the very bottom of Moody’s investment grade ratings and implies moderate credit risk.
A lower credit rating would put Cromwell Property Group in the basket “of speculative grade” and imply “significant credit risk”, a position which could make future debt funding more expensive for the $10.1 billion property manager.
Moody’s Investors Service said it had “placed on review for downgrade” Cromwell Property Group’s Issuer Rating of Baa3 and the Baa2 senior secured ratings of Cromwell Property Securities Limited, (the manager of the Cromwell Diversified Property Trust) and Cromwell’s debt securities issuance arm CDPT Finance Pty Ltd.
The credit rating agency said it considered Cromwell’s liquidity position to be weak, as it is “funding investments with short-term loans”.
Cromwell currently has a short-term margin loan facility of $123 million to fund its near 10 per cent interest in takeover target Investa Office Fund as well as two short-term loan facilities in place, drawn to $205 million, which have partly funded its stake in the Cromwell European Cities Income Fund.
“The rating action follows Cromwell’s recording of a high level of financial leverage as at fiscal year-end June 2017, in large part due to its investment initiatives,” said Maurice O’Connell, a Moody’s vice president and senior credit officer.
“Financial leverage, measured as adjusted net debt to EBITDA, was high at 7.6x as at June 2017 and outside the tolerance level set for the rating,” Mr O’Connell added.
The credit rating review follows Cromwell’s announcement on Friday that it had commenced the process with Moody’s to withdraw its public issuer rating, and to obtain a private issuer rating and a single public rating of its secured debt platform.
“This strategy for our Moody’s ratings supports our stated capital management strategy. As we reported in our FY17 results announcement, we propose to enter into arrangements on our secured debt platform that are expected to lengthen tenor and diversify funding sources,” said Cromwell CEO Paul Weightman.
“We expect that moving to one public rating, against a debt platform secured by Australian property assets, will put Cromwell in the best position to finalise those arrangements on the best possible terms,” he added.
The potential Moody’s downgrade could increase tensions between Cromwell and its biggest security holder, South African property giant Redefine, which owns 26 per cent of the A-REIT.
The Australian Financial Review’s Street Talk column reported earlier this month that Redefine was not too happy about Cromwell’s unsuccessful bid to takeover the Investa Office Fund and might seek to sell its stake.
