Swiss real estate company PPG assigned preliminary ‘B+’ rating; outlook positive

LONDON: The S&P Global Ratings has assigned preliminary ‘B+’ long-term issuer credit rating to Swiss-Based Real Estate Company Peach Property Group AG (PPG) and preliminary ‘BB-‘ issue rating to its proposed senior unsecured notes.

The preliminary rating on Peach Property Group AG (PPG) reflects the company’s relatively small portfolio size, its focus on secondary cities in Germany, and its relatively high leverage ratios.

PPG has successfully reshaped its business from development properties to pure rental-income-producing properties over the past few years. This move was further enhanced by PPG’s recent acquisition of around 3,650 apartments valued at about Swiss franc (CHF) 292 million, which took PPG’s total ownership to around 12,450 units, worth about CHF1.1 billion (about €1 billion).

“We note that the company has successfully decreased vacancy rates for select properties in the past, as well as its relatively large refurbishment plan to reduce vacancies and achieve higher rents following the capital expenditure,” S&P said.

PPG has now transitioned away from its relatively unprofitable development activities, with only one development project left to sell, which is a group of high-end apartments in Zurich.

PPG’s financial risk profile is based on company’s relatively high debt leverage compared with other German residential real estate peers. “We project that PPG’s S&P Global Ratings-adjusted ratio of debt to debt plus equity will be about 70% at year-end 2019, with the adjusted EBITDA-to-interest ratio at about 1.5x. We expect that these ratios will improve, and estimate that leverage will decrease closer to about 65%, with EBITDA interest coverage approaching 1.6x by year-end 2020. We take into account the company’s high ratio of debt to EBITDA of about 19x in 2019, but note that the ratio is somewhat distorted due to asset rotation during the year”.

PPG has an average debt maturity profile of six years, pro forma its proposed notes issuance, and an average cost of debt of 2.6%.

The final rating will depend on receipt and satisfactory review of all the final transaction documentation for the proposed senior unsecured notes issuance of approximately €250 million. Accordingly, the preliminary ratings should not be construed as evidence of final ratings.

If S&P Global Ratings does not receive the final documentation within a reasonable timeframe, or if the final documentation departs from the materials reviewed, S&P reserves the right to withdraw or revise the ratings. Potential changes include, but are not limited to, utilization of note proceeds, maturity, size, and conditions of the notes, financial and other covenants, and security and ranking of the notes.

“The positive outlook reflects our view that we may raise the ratings within the next six-to-12 months if PPG’s overall credit profile improves more than we anticipate and if the company reduces leverage such that our ratio of debt to debt plus equity moves below 65% on a sustainable basis. This could result from equity-financed acquisitions or an overall reduction of outstanding debt.

“We would raise the rating within the next six-to-12 months if PPG reduces its ratio of adjusted debt to debt plus equity to below 65% on a sustainable basis, while sustaining its EBITDA interest coverage above 1.3x. An upgrade would also require PPG’s business operations to continue benefiting from positive fundamentals such as rising rental income and falling vacancy rates.

“Additionally, we would also view positively a sustainable reduction in PPG’s debt-to-EBITDA ratio to below 13x.

“We might revise our outlook to stable if PPG failed to improve its credit metrics in the next six-to-12 months and achieve a ratio of debt to debt plus equity of close to 65% or below, or if EBITDA interest coverage were to fall to below 1.3x. We would also view operating fundamentals becoming challenging as credit-negative, including falling rents, decreasing asset prices, or rising vacancy rates”.

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