Upload
ngotu
View
217
Download
4
Embed Size (px)
Citation preview
Vesteda Residential Fund
Business Case and process for obtaining a corporate credit rating
DACT Treasury Beurs13 November 2015
Vesteda at a glance
9 Largest Dutch commercial residential property fund9 Strongly positioned in the mid-market unregulated sector9 High quality and diversified portfolio, low vacancy rates9 Internally-managed, low cost 9 Owned by 19 institutional investors9 Conservative capital structure
2013A 2014A H1 2015A
Residential units (#) 23,791 22,990 22,792
Portfolio value €3.7bn €3.6bn €3.6bn
Leverage 35.7% 34.5% 29.5%
Gross rental income1) €240m €237m €117m
Net rental income €181m €176m €87m
Net yield2)3) 4.5% 4.8% 4.8%Physical occupancy (year-end) 96.1% 96.6% 97.4%
Primary areaSecondary areaOther
Portfolio Value
Municipalities
€ 750 million
€ 400 million
€ 75 million
As of 2014YE
Note 1) Theoretical gross rental income less loss of rent Note 2) Net rental income as % of investment portfolio at the beginning of the yearNote 3) Net Yield H1 2015 on annualised basis
Key facts
Key strengths of the Fund Diversified portfolio in ‘economically robust’ regions
Two Storm FrontsAssets and debt funding under pressure
Source: CBS / AFME
Average house prices (EUR)
4
Dutch housing market decline
190
200
210
220
230
240
250
260
270
50%
60%
70%
80%
90%
100%
110%
120%
-21%
Jan-13
Jan-11
Jan-12
Jan-09
+17%
Jan-10
Jan-14
Jan-08
House transaction prices (lhs)Rental price index (rhs)
Rental price index(2008=100)
Drought in Securitisation markets
Housing prices have come down and CMBS market disappeared
Time for Action – Adaptation of the liability side
� Unlock the stranglehold of the CMBS structure
� Deleverage in order to avoid default
� Implement diversification of funding sources
� Generate funding flexibility with ability to tap the most liquid sources/markets
� Create a future proof and scalable debt capital structure
5
Vesteda Treasury long-term target: Creating a reliable funding structure that serves the business at an optimal price
2014
Q1 Q2 Q3 Q4
2015
Q1 Q2 Q3 Q4
2013
Q1 Q2 Q3 Q4
2011
Q1 Q2 Q3 Q4
2012
Q1 Q2 Q3 Q4
April 2015: RepaidEUR 300m A4 Notes
April 2014: RepaidEUR 350m A7 Notes
July 2013:Repaid EUR 150m A6 NotesEUR 625m A8 Notes
April 2012:RepaidEUR 400m A3 NotesEUR 350m A5 Notes
48.3% 9.7% 22.6% 19.4%CMBS Repayment:
Forward Start Facility Certainty of funds
EUR 625mA8 Notes issued
End of CMBS Program
1) A8 Notes repaidby FSF
2) A6 Notes repaid
FSF refinanced by Club Deal
Vesteda can begin non-CMBS funding
Vesteda’s road map for CMBS refinancing
7
Bond Issue #1
CMBS Modification complete
Bond Issue #2
USPP
NewRCF
Start of CMBS refinancing project
CorpRating
Credit rating research:A combination of work and academic research (VU RT)
8
Idea for a thesis that is linked to a ‘live’ business problem:
� Access: A credit rating might enable access to a larger pool of funding alternatives
� Trade-Off: Analysis of the ‘pros and cons’ of a credit rating (CR)
� Return: Impact on Cost of Capital
Thesis: “What are the relevant strategic considerations, costs and benefits for Vesteda to obtain a Corporate Credit Rating?”
Some theory.....main concepts of a credit rating
9
1. Main role of credit rating agencies:� Information intermediation� Signaling service� Providing a neutral opinion
2. Key demand drivers for a credit rating: � Screening instrument for reducing informational asymmetry, reveal hidden information� A company wants to present to the market that it is creditworthy� Rating agency is considered more trustworthy than the company
3. CRs have additional value other than transmitting information:� Certification � Regulatory� Standardization
The credit rating industry
10
� Worldwide a total of some 150 rating agencies are in operation
� The market share of the top 3 rating agencies is 90%1 or more
40%
35%
16%
10%
S&P Moody's Fitch Other
1) ESMA publication: Credit Rating Agencies’ 2014 market share
A. Legislation: SEC selected Moody's, S&P and (later) Fitch for setting standards in 1930’s
B. Reputation: CRA’s reputation drives on having extensive experience with a wide range of bond issues
C. Economies of scale: Market preference for a small number of rating to facilitate rating comparability and efficiency
Three dominant players
European market share rating agencies
The dominant status of the Top 3 CRAs is a result of:
To rate or not to rate....?Rated vs Unrated Issuance: The Heineken Case
11
70
75
80
85
90
95
100
105
110
Ba
sis
Po
ints
Heineken N.V. (5 year CDS spread)
Source: Thomson Reuters ,2013
� For some 25 years Heineken did not have a credit rating� Heineken was able to access the credit markets without a credit rating� On 7 March 2012, Heineken was rated Baa1 and BBB+ by Moody’s and S&P respectively� Day of rating publication: Pricing of Heineken’s outstanding debt narrowed by some 15 basis points� Secondary curve of Heineken bonds contracted by some 30 basis points after the announcement
Selection of rating agenciesTwo rating norm
12
The Two-rating norm � Large and frequent bond issuers mostly obtain multiple credit ratings� Market participants assume that two credit ratings provide additional information� A dual rating facilitates rating-based regulation on a min two-rating condition
A combination of Moody’s and S&P is the preferred standard:� Highest perceived reputation� Provide most standardized investment benchmark � Fitch typically functions as a “third opinion” for large bond issues
Rating agency remunerationRating fees
13
� Example of rating fees based on EUR500M debt issuance in CRA fee structure (2014):
� Standard fee schedule, limited room for negotiation
� Commercial and analyst function strictly separated
Fee schedule 2014 S&P Moody's Fitch
Initial Rating Fee € 54,000 € 30,000 € 66,000
Issuance Fees € 275,000 € 292,500 € 287,500
Surveillance Fee € 53,000 € 75,000 € 66,000
Total Fees € 382,000 € 397,500 € 419,500
Ratings in European Real Estate Sector
14
Observations:
� S&P rates most investment grade European RE
companies in its portfolio (17 ratings)
� Eight companies are single rated by S&P, three are single
rated by Fitch and none are single rated by Moody’s
� In case of dual rating the rating outcome of Moody’s tends
to be one notch lower (split rating) compared to the other
two rating agencies
� VRF’s most direct peer company Deutsche Annington
(Vonovia) only has a single rating by S&P
� The largest European RE companies in terms of issuance
(Unibail, Klepierre, Gecina & Vonovia) are all rated by S&P
Rated RE Company Fitch Moody’s S&P
Atrium BBB- - BBB-
Befimmo - - BBB
British Land BBB+ - -
Citycon
Baa3 BBB-
Cofinimmo - - BBB-
Corio - Baa2 BBB+
Derwent London PLC - - BBB
Deutsche Annington - - BBB
Fonciere des Region - - BBB-
Gecina - Baa2 BBB
Global Switch BBB Baa3 BBB
Goodman European Logistics
Baa3 BBB
Hammerson BBB+ Baa2 -
ICADE - - BBB+
Klepierre - - BBB+
Mercialys - - BBB
PSP Swiss BBB+ - -
Prologis European Properties II - Baa3 BBB
Segro BBB+ - -
Societe Fonciere Lyonnaise - - BBB-
Unibail-Rodamco A - A
Ratings by top 3 agencies in the European real estate sector
Role of the rating advisor
15
� Expertise
� Pre-analysis, applying rating methodology
� Relieving the work load
� Running the process
� Sounding the rating agencies
� Information intermediary
� Capital structuring advice
� Support for annual surveillance
• Notification to rating agencies
• Introductory Meetings
• Potential clarification of issues requested by rating agencies
• Collection of information
• Preparation of Management Presentation
• Management Presentation Meetings
• The rating agencies present their decisions to management of Issuers
• Proceed to public announcement if satisfied, otherwise appeal
WEEK 1-2Preparation
WEEK 2-7Execution
WEEK 8Rating
Meetings
WEEK 9-11Follow Up
Rat
ing
Pro
cess
Ind
icat
ive
Tim
etab
le WEEK 12Rating
Conclusion
Preparation for Rating Meetings
Rating Agency Committee Meeting
Rating AgencyMeetings
Proceed
Rating Assignment
Announcement of Rating
Appeal meeting
Request Rating:Agency assigns
industry rating relationship and
analyst team
Proceed
Selection of a Rating Advisor
Analysis of Potential Rating Outcome
Yes
YesNo
Indicative time line rating process
Initial rating process...min. 12 weeks
S&P methodology VRF rating assessment (high level)
I. VRF Business Risk Profile: • RE industry is classified as a 'low risk' industry• VRF has a 'strong/satisfactory' competitive advantage
profile
II. VRF Financial Risk Profile - Key credit metrics: • Debt service capacity: EBITDA to Interest coverage (ICR)• Leverage: Debt to total of Debt and Equity
Intermediate
Significant
Modest
1,8x
2,0x
2,2x
2,4x
2,6x
2,8x
3,0x
3,2x
3,4x
3,6x
3,8x
4,0x
2013E 2014F 2015F
EBITDA / Interest
Fixed charge cover (x)
Intermediate
Significant
Modest30%
40%
50%
60%
2013E 2014F 2015F
Debt / Debt + Equity
Debt / Debt + Equity
V
RF
Bu
sin
ess r
isk
pro
file
VRF Financial risk profile
Minimal Modest Intermediate Significant Aggressive
Highly
leveraged
Excellent AAA/AA+ AA A+/A A- BBB BBB-/BB+
Strong AA/AA- A+/A A-/BBB+ BBB BB+ BB
Satisfactory A/A- BBB+ BBB /BBB- BBB-/BB+ BB B+
Fair BBB/BBB- BBB- BB+ BB BB- B
Weak BB+ BB+ BB BB- B+ B/B-
Vulnerable BB- BB- BB-/B+ B+ B B-
S&P methodology: Vesteda credit profile
Credit ratingPossibly added value at a price
19
Obtaining a credit rating implies:
� Restriction of flexibility for changing financial strategy and leverage policy
� Additional risk management aspect: the rating downgrade
� Cost of discipline and transparency
� Two ratings reduce dependency but:
• Risk split-rating
• Increased costs
• Time consuming
Key Take-Aways
� Long-term view on capital structure
� Design a feasible time plan
� Deliver as promised
� Speed up whenever possible
� Rating Advisor
� Cost-benefit analysis
� Dedicated project team
� Partnership and open dialogue with relationship banks
20
Execution as communicated