Midrog Company lowers the rating of the bonds (series 11, 12, 13, 10, 15, and 16) that it issued
G City
-3.46%
Base:1,126
opening:1,120
High:1,120
low:1,059
change:3,765,014
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from A1.il to A3.il as well as downgrading the bonds (series 10) from Aa3.il to A2.il. Rating horizon: negative. Will this be enough and we will not see further downgrades?
The downgrade is due to the weakening of the company’s financial profile, which is expressed in a ratio of net debt to net CAP of approximately 71% (extended solo) as of September 30, 2022 compared to a ratio of approximately 64% prior to the G Europe transaction. The net debt to FFO coverage ratio is very slow and is expected to remain over 50 years in the short-medium term, and are weak for the current rating level. The erosion in the stability ratio was mainly due to an increase in the financial debt for the purchase of the minority shares in G Europe and the erosion of the capital due to the weakening of the activity currencies against the shekel. The company has a significant realization plan which, if implemented, is expected to lower the leverage, according to Midrog’s assessment to a range of 68%-72%, depending on the scope and pace of the realization plan and also depending on the scope of the distribution of dividends by the company. In our estimation, implementations on a significant scale may take a longer period of time than expected and the company has a risk of high leverage over time.
The company’s activity in the USA, Europe and Israel, in the field of commercial real estate in countries with high credit ratings, is characterized by a strong and stable economic environment over time. The interest rate increases in the past year against the background of high inflation data led to volatility in the capital markets and economic uncertainty which creates pressures on the values of real estate assets at this time and in the medium term. This environment casts doubt on the company’s plans to sell assets on a large scale. The operating environment is negatively affected by the company’s activities in Brazil, which is characterized In weak macroeconomic conditions, according to Midrog, the activity in Brazil exposes the company to the erosion of its equity as a result of the volatility in the Brazilian real exchange rate.
A strong and established business profile, with a balance sheet (extended solo) of approximately NIS 26 billion as of 09/30/2022 and a high-quality, decentralized asset portfolio. The company’s assets are spread over 5 main territories that include Israel, Eastern and Central Europe, Northern Europe, Brazil and the USA. The company’s base assets are characterized as service-based commercial centers, anchored by supermarkets, which serve the basic daily needs of the target audience. The company’s assets maintain rates Occupancy has been high over the years, and as of September 30, 2022, the occupancy rate in the company’s properties is in the range of 91.8%-98%.
The financial flexibility of the company stands out in favor of the rating level. As of September 30, 2022, the company, together with wholly owned subsidiaries, has unencumbered assets in the amount of approximately NIS 9.4 billion, which constitute approximately 36% of the total expanded solo balance sheet. Midrog estimates that the proportion of free assets from encumbrance is expected to decrease with the progress of the realization of the assets and the assumption of debt secured by the assets. This flexibility somewhat compensates for the weakening of the company’s accessibility to refinance unsecured tradable debt in the Israeli capital market, in light of the high margins.
The company’s liquidity relies on significant liquidity balances and credit facilities. As of September 30, 2022, the company (extended solo) has cash balances, deposits and a real estate portfolio totaling approximately NIS 1.4 billion, as well as unused credit facilities totaling approximately NIS 1 billion. In Midrog’s baseline scenario, which assumes, among other things, the realization of assets on a relatively moderate scale, and no recycling of liabilities , the company’s liquidity balances are expected to erode in such a way that the ratio of liquid sources (including signed and unused credit facilities) to non-senior debt repayments two years from now is expected to erode to a level of 80%-90% compared to approximately 110% as of 09.30.2022 depending also on the scope of the distribution of dividends.
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