Global Logistic Properties Limited -- Moody's affirms GLP's Baa2 ratings after transaction plans announced
The affirmations were made after the company announced the following proposed transactions: (1) disposal of assets to a J-REIT and (2) investment in funds that own logistics facilities in Brazil.
The ratings outlook is stable.
With respect to the proposed J-REIT transaction, the company plans to sell 30 of its Japanese logistics facilities to a J-REIT for a target consideration of around USD2.6 billion (JPY209 billion).
GLP will continue to act as the asset manager as well as maintain a minority interest in the J-REIT.
GLP plans to invest in funds that own logistic facilities in Brazil, by partnering with various investment funds, including Canadian Pension Plan Investment Board, China Investment Corporation and the Government of Singapore Investment Corporation ("GIC"), GLP's major shareholder.
GLP's share of initial equity investments will amount to approximately USD334 million.
"The proposed J-REIT transaction will improve GLP's credit metrics in the near term as well as its cash-on-hand," says Kaven Tsang, a Moody's Vice President and Senior Analyst.
The proposed asset disposal represents approximately 18% of GLP's total assets as of September 2012.
The new J-REIT will continue to be managed by GLP, to ensure that the J-REIT's performance remains unchanged.
Moody's estimates the disposal will decrease the company's annual EBTIDA by about USD100 million after factoring in the company's share of dividends and manager fees.
However, the disposal will also bring in net cash of USD1 billion, which will provide additional liquidity for funding its operations and investments.
Moreover, the USD1.1 billion debt reduction from the asset disposal, adjusted for pro-rated share of debt in the new J-REIT, outweighs the decline in EBITDA.
Moody's therefore expects some improvement in GLP's credit metrics; adjusted net debt/EBITDA will decrease to 4x-6x in the next 1-2 years from about 7.4x in FY 2012.
"While the disposal represents a shrinking of GLP's mature and stable portfolio, and an increase in its exposure to the emerging markets, Moody's believes that the incremental risk is manageable," says Tsang who is also Moody's lead analyst for GLP.
The investments in Brazil will have limited impact on GLP's credit profile given their small scale, which represents less than 2.5% of GLP's total assets.
This is consistent with the company's track record of a disciplined and progressive approach in managing its expansions, which has been demonstrated in its China portfolio.
Furthermore, a major portion (approximately 56% in terms of owned Gross Leasable Area) of the properties under the two Brazilian funds have been stabilized and are now being managed by experienced managers. These are cash generative and will provide GLP with a pro-rata share of revenue of approximately USD34 million per annum, before incremental fee income.
The additional capital expenditure required to develop the projects in the Brazilian funds is manageable, and its partnership with the major investors could reduce its funding risk.
GLP's Baa2 issuer rating continues to reflect its leading market position in modern logistics facilities in Japan and China.
Despite its proposed disposal, Moody's estimates that GLP's large and established Japanese portfolio will continue to generate USD250-USD260 million in EBITDA per annum for the next 2-3 years, representing approximately 50% of GLP's total EBITDA.
This cash flow is a stable funding source for the company's increasing business in the emerging markets.
At the same time, the Baa2 rating captures the company's exposure to regulatory uncertainties and implementation risks associated with its expansion in emerging markets like China.
However, such implementation risk has been well managed by the company, which maintains low investment costs and employs progressive investment and efficient planning.
The Baa2 rating further takes into consideration the company's seasoned management team, which has a wealth of experience and expertise in logistics real estate management.
The Baa2 rating has incorporated a one-notch downward adjustment for structural and legal subordination risk arising from GLP's holding company status and because most of its loans are at the subsidiary level and secured by properties.
Secured debt represented most of the company's total debt and 26.5% of its total assets as of September 2012.
This debt structure is unlikely to change in the near to medium term.
The stable outlook reflects Moody's expectation that GLP will maintain continued access to bank funding and a stable capital structure, balancing its equity and debt levels, and recycling capital to fund its planned expansion.
The rating could be upgraded if GLP can improve its (1) debt leverage, with debt/total assets falling under 30%, and (2) debt servicing capacity, with net debt/EBITDA declining below 4x-5x and EBITDA interest coverage surpassing 5x-6x on a sustained basis.
The rating could be downgraded if (1) GLP's EBITDA declines sharply as a result of an economic deterioration in Japan and/or China; (2) the company's exposure to the emerging markets -- excluding China -- materially increases beyond 20% of its total assets; or (3) the company pursues an aggressive debt-funded expansion, such that debt/total assets exceeds 45-50%, net debt/EBITDA surpasses 6x-7x, or EBITDA interest coverage declines below 2.5x -3x on a sustained basis.
The principal methodology used in this rating was Moody's Approach for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Global Logistic Properties Limited is a major operator of modern logistics facilities in Japan and China. As of 30 September 2012, it had 4.1 million square meters of completed gross floor area in seven major cities in Japan. In China, it had 12.1 million square meters of gross floor area in 31 cities, of which 6.9 million square meters were developed.
The company was listed on the Singapore Stock Exchange in October 2010. GIC, Singapore's sovereign wealth fund, is the single largest shareholder with a 50.6% stake.
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Kaven Tsang Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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