S&P Removes American Realty Capital Properties (ARCP) from CreditWatch Negative

Standard & Poor's Ratings Services today affirmed its 'BB' corporate credit and 'BB+' issue-level ratings on on American Realty Capital Properties Inc. (Nasdaq: ARCP) and its operating partnership, ARC Properties Operating Partnership L.P., and removed them from CreditWatch negative. The outlook is negative.

"The CreditWatch resolution reflects our view that some of the uncertainty surrounding ARCP has dissipated after the company filed amended financial statements for full-year 2013, first- and second-quarter 2014, and financial statements for third-quarter 2014. The possibility of default resulting from a breach of requirement for timely reporting of financial statements has subsided," said credit analyst Jaime Gitler. "The financial statement improprieties that the company corrected were limited to the calculation of adjusted funds from operations, a non-GAAP measure, and related party transactions, which resulted in recovery to ARCP of about $8.5 million from ARC Properties Advisors, LLC and certain of its affiliates. The audit committee investigation also found that that equity awards made to former executives were more favorable than what the company's Board of Directors had approved and that there are material weaknesses in the company's internal controls over financial reporting and disclosure controls and procedures."

The outlook is negative. The underlying assets are performing as expected and we believe the company has made progress in resolving the most urgent issue following the announcement in October 2014 that filed financial statements were not to be relied upon. The resolution prompted us to remove the ratings from CreditWatch negative because the potential for imminent default risk was resolved with the filing of financial statements. However, we believe longer-term uncertainty surrounding ARCP remains in spite of the filing. The company faces uncertain litigation costs, has yet to appoint a new management team, announce possible board level changes, remediate material weaknesses in its internal controls, or file 2014 annual financials.

If ARCP were to reverse course in resolving the items listed below, which we believe are necessary to regain its market standing, or if the company experiences issues with liquidity, possibly owing to higher litigation costs, we could lower the rating.

We could revise the outlook to stable if the company successfully transitions to a new executive team (who provide clarity on the company's future financing and capital allocation strategy), improves the composition of the board of directors and key governance practices (including remediation of discovered material internal control weaknesses), files annual financial statements for 2014, the overhang of potential litigation costs becomes more transparent, and if the company demonstrates adequate liquidity and ample capital to finance its potential needs.

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