Equity raisings may support credit ratings but not always

Following the lead from GPT Group the week before last, Stockland Group became the next Australian real estate investment trust to approach the stock market with a sizeable equity raising, although the move did not elicit quite the same response from Standard & Poor's.

Stockland's announcement that it was seeking to raise up to $2.0 billion, including $1.53 billion to come from an underwritten institutional placement, led S&P to affirm the 'A-/A-2' long- and short-term credit ratings assigned to the group and revise the outlook to stable from negative.

S&P noted that about $1.4 billion of the funds raised would be used to retire debt. Nevertheless, it warned that Stockland's credit rating could still be lowered if the Residential Division continues to weaken financial metrics or if large-scale acquisition was made that weakens the group's business or financial risk profile.

However, the recent capital raisings by Stockland, GPT and even Westfield have not prevented Moody's Investor Service from maintaining a negative outlook on the A-REIT sector. In Moody's report, "Australian Real-Estate Investment Trusts: Negative Outlook on Worsening Sector Fundamentals" released last week, the agency notes "The multiple challenges which Moody's identified six months ago - a worsening operating environment, increased leverage due to falling asset values, and limited financial flexibility - are deepening and causing rating pressures."  

Moody's wrote in its report that "the decline in asset valuations is raising the risk of breaches of gearing covenants for some, heightening the pressure on some companies to lower gearing. However, they have limited financial flexibility to do so, given distribution payout levels which remain high, and severe capital market dislocations which hinder their ability to raise equity or sell assets."

Also, refinancing risk persists because of sizeable refinancing requirements over the next 12 to 18 months; and access to capital is difficult since the bond and commercial mortgage-backed securities markets remain largely inactive and the banks are cautious about their exposures to the property sector.

Shifting industry sectors, Fairfax Media Ltd has endeavoured to improve its credit risk profile with an equity raising in February and asset sales. Nevertheless, this has proved insufficient to prevent S&P from lowering its long-term credit rating to 'BB+' from 'BBB-' and lowering the rating on its stapled preference securities to 'B+' from 'BB'. The outlook on the ratings is stable.

S&P observed that although Fairfax's credit metrics have benefited from the equity issue and assets sales, the weaker earnings outlook for the remainder of calendar 2009 has resulted in underlying credit metrics moving outside of tolerances for the 'BBB-' rating. In addition, the lack of visibility in a recovery of earnings and reduced financial flexibility to improve credit metrics through other means, comes at a time when Fairfax's business faces structural challenges relating to the migration of advertising revenue away from traditional newspapers.

SP AusNet Group's proposed equity raising of up to $415 million gained a tick of approval from S&P for supporting the group's financial profile over the medium term. S&P said the equity raising, along with capital management initiatives announced at the same time, should partly offset the adverse cash flow implications of the recent regulatory decision by the Australian Energy Regulator, the upcoming high capital spending on the group's assets and the challenging credit market conditions.

However, S&P noted that to maintain its 'A-/Negative' rating SP AusNet Group will have to strengthen its underlying profile.

S&P was also supportive of Santos' (BBB+/Stable/A-2) proposed equity raising of at least $1.65 billion, noting that the raising would improve Santos' already strong liquidity and financial flexibility. Moody's took the opportunity to affirm the 'P-2' short-term rating that it assigns to Santos Finance Ltd.