Fitch: Simon's Proposed Acquisition of Macerich Would Likely Have Negative Credit Implications

NEW YORK--(BUSINESS WIRE)-- The proposal by Simon Property Group, Inc. (NYSE: SPG) to acquire The Macerich Company (NYSE: MAC, Macerich) for $91.00 per share in cash and SPG shares, if consummated as proposed, would likely have negative credit implications for SPG according to Fitch Ratings. The proposed transaction would increase SPG's leverage materially above the 5.1x level as of Dec. 31, 2014 while also lowering the company's unencumbered asset coverage of unsecured debt. If an agreement is reached, Fitch would review revised transaction terms, if any, and the company's ratings and Outlook. Currently, the company's long-term Issuer Default Rating (IDR) is 'A' with a Stable Outlook.

PROPOSED TRANSACTION

On March 9, 2015, SPG announced a proposed transaction to acquire MAC for approximately $22.4 billion, including the assumption of MAC's approximately $6.4 billion of debt outstanding, including MAC's pro rata share of mortgage debt from unconsolidated entities. SPG also reached an agreement in principle to sell certain Macerich assets to General Growth Properties, Inc. (NYSE: GGP, Not Rated) in connection with the closing of the acquisition. The GGP sale would not be a condition to closing the transaction. The proposed agreement between SPG and GGP removes a potential bidder for MAC, thereby increasing the probability of SPG winning MAC. However, hostile public-to-public REIT transactions oftentimes pose challenges to the bidder by the target.

POTENTIAL CREDIT IMPLICATIONS

Credit concerns inherent in the proposed transaction include a weakening of the balance sheet as measured by net debt-to-EBITDA. Fitch's expectation of leverage sustaining above 5.5x would be one factor inconsistent with the 'A' IDR. Moreover, the company's unencumbered assets (based on a stressed 7% capitalization rate) to net unsecured debt ratio of 2.6x would weaken if the MAC transaction closes as proposed. If consummated, Fitch anticipates that SPG would maintain adequate liquidity and excellent access to capital. The company's liquidity coverage ratio is 1.4x for the period Jan. 31, 2015 to Dec. 31, 2016, driven by an industry-leading revolving credit facility capacity, which will enable the company to fund upcoming debt maturities and capital expenditures, along with $1.3 billion of expected development costs. Moreover, SPG's adjusted funds from operations payout ratio was 64% during 2014; based on the current payout ratio, the company retains over $1 billion annually in organic cash flow.

Credit positives inherent in the proposed transaction include the potential to acquire a high-quality mall portfolio as measured by MAC's strong sales per square foot and occupancy ratios. Nevertheless, SPG has outperformed MAC on both measures, with SPG's sales per square foot at $619 as of Dec. 31, 2014 compared with $587 - both high levels compared to the mall industry at large. SPG's occupancy in its U.S. malls and Premium Outlets was 97.1% as of Dec. 31, 2014 compared with MAC at 95.8%.

SPG's average same-store net operating income (NOI) has outperformed MAC by 110 basis points from 2008-2014, which speaks to Simon's stronger property level performance, while SPG also has materially lower general and administrative costs as a percentage of total revenues when compared with MAC. Therefore, SPG has the potential to drive above-average cash flow growth if the MAC transaction is consummated. In addition, the proposed transaction would increase SPG's exposure to strong demographic regions in California (29% of MAC's expected 2015 pro rata NOI), New York (18.3%) and Arizona (17%).

RATING SENSITIVITIES

The following factors may have a negative impact on SPG's ratings and/or Outlook:

--A highly leveraged transaction that materially weakens the company's credit profile;

--Fitch's expectation of fixed-charge coverage sustaining below 3x;

--Fitch's expectation of leverage sustaining above 5.5x.

The following factors may have a positive impact on SPG's Ratings and/or Outlook:

--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (this ratio was 3.7x in 2014);

--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.1x at Dec. 31, 2014).

Fitch currently rates the companies as follows:

Simon Property Group, Inc.

--Long-term IDR 'A';

--$75 million preferred stock 'BBB+'.

Simon Property Group, L.P.

--Long-term IDR 'A';

--Short-term IDR 'F1';

--$6.75 billion unsecured revolving credit facilities 'A';

--$240 million unsecured term loan 'A';

--$13.4 billion senior unsecured notes 'A';

--$409 million commercial paper notes 'F1'.

Simon CP 2

--$409 million commercial paper notes 'F1'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'2015 Outlook: U.S. Equity REITs' (Dec. 16, 2014);

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov.

25, 2014);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);

--'Corporate Rating Methodology' (May 28, 2014);

--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

2015 Outlook: U.S. Equity REITs (Capital Access Underpins Disciplined Growth)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=828828

Rating U.S. Equity REITs and REOCs (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957

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Fitch Ratings, Inc.
Primary Analyst
Sean Pattap
Senior Director
+1-212-908-0642
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Britton Costa, CFA
Director
+1-212-908-0524
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations
Sandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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