S&P Affirms Ratings on HCP, Inc. (HCP); Debt Coverage Remains Strong

October 26, 2015 2:19 PM EDT

Standard & Poor's Ratings Services today said it affirmed its 'BBB+' corporate credit rating on HCP, Inc. (NYSE: HCP). The outlook is stable.

At the same time, we affirmed our 'BBB+' issue-level rating on the company's senior unsecured notes.

"HCP's financial risk is characterized by strong debt coverage measures and relatively low leverage, although HCP largely financed its growth through the first half of 2015 with debt," said Standard & Poor's credit analyst Michael Souers.

"We expect asset sales in the second half of 2015 and in early 2016 to drive leverage down somewhat, although we expect it will remain slightly above year-end 2014 levels," he added.

We apply a positive one-notch adjustment to the company's anchor score of 'bbb' for comparable rating analysis. This adjustment is based on our view that management is committed to lowering leverage, and that HCP's credit metrics compare favorably to similarly rated peers.

The stable outlook reflects our view that the company's fundamentals remain favorable and HCP will pursue growth in a leverage-neutral manner, keeping FCC in the mid-3x area with leverage declining slightly from current levels.

We would consider lowering the ratings by one notch if tenant stress or large leveraged acquisitions caused debt to EBITDA to rise above 6.5x or FCC to decline below 3x for a prolonged period. This could result in the removal of the positive comparable rating analysis modifier.

An upgrade is unlikely over the next one to two years because of HCP's high tenant concentration and challenges facing its largest tenant. Longer-term, an upgrade would depend on HCP's ability to increase the diversity of its tenant mix while continuing to realize annual contractual rent increases. This scenario could prompt an upward revision of our business risk profile assessment to "strong" from "satisfactory."

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