Fitch Rates CBL's Unsecured Notes Due 2026 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-' rating to the expected senior unsecured notes due 2026 issued by CBL & Associates Limited Partnership. Net proceeds are expected to be used to reduce amounts outstanding under its revolving credit facilities and for general corporate purposes. A full list of Fitch's current ratings for CBL follows at the end of this release.

KEY RATING DRIVERS

Fitch views CBL as having weaker access to capital (particularly unsecured debt and equity) than most other investment grade REITs, although Fitch views positively the company's access to the unsecured bond market via this issuance. Market sentiment for 'B' malls generally and CBL specifically has eroded given the challenges ascertaining the long-term productivity and financability of this asset class.

These factors are balanced by Fitch's expectation of otherwise positively trending and investment grade leverage and fixed-charge coverage (FCC) metrics. Further, while 'B' malls are less financeable than most traditional real estate assets, they are considerably more financeable than niche asset classes such as casinos, data centers and hospitals.

EVOLVING ACCESS TO UNSECURED DEBT CAPITAL

Mortgage availability for 'B' malls is less plentiful and more discerning than it was in prior years. Similarly, Fitch views CBL's access to non-bank unsecured debt capital to be at the lower end of the spectrum attributable to both its asset class and being a less-seasoned issuer. Prior to this offering, CBL last raised unsecured bonds via a $300 million offering in October 2014 and $450 million via its inaugural unsecured bond offering in November 2013. In 4Q'15, the company obtained a $350 million, two-year unsecured bank term loan (extendable to 2019 at the company's option) after a terminated bond offering in 3Q'15, which Fitch views as a weaker form of unsecured debt issuance.

The company does not have any unsecured debt maturities until 2018 (including company extension options), when $450 million of term loans come due. However, the company typically has meaningful amounts drawn on its unsecured lines of credit (40% drawn as of Sept. 30, 2016), and the use of proceeds from this offering will be used to repay outstanding debts.

SECURED MATURITIES WEIGH ON LIQUIDITY

CBL's base case liquidity ratio of 0.9x through the end of 2018 is low for the rating and constrained by more than $1.4 billion of pro rata debt maturities through 2018-end. Liquidity coverage improves to 2.5x under a scenario whereby the company refinances 80% of secured debt with new mortgages. Fitch expects the company will seek to address these debt maturities via draws on the company's unsecured revolving credit facilities, asset sale net proceeds, and new secured debt refinancings or give backs to lenders.

Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources of liquidity include unrestricted cash, availability under unsecured revolving credit facilities, and projected retained cash flow from operating activities after dividends. Uses of liquidity include pro-rata debt maturities, expected recurring capital expenditures and remaining development costs.

INVESTMENT-GRADE CREDIT METRICS; SLIGHTLY HIGH LEVERAGE

CBL's LTM leverage was 6.5x at Sept. 30, 2016, as compared with 6.6x and 6.5x as of Dec. 31, 2015 and 2014, respectively. Fitch expects that leverage will remain in the high 6.0x's into 2018, driven by low single-digit SSNOI growth and asset sales, offset by (re)development spending. Should CBL continue to return over-levered mortgages to lenders, leverage could improve towards 6x.

Fitch recently revised the treatment of REIT cumulative perpetual preferred stock to 50% equity credit from 100%. CBL's LTM leverage based on net debt including 50% of preferred stock was 6.9x at Sept. 30, 2016, slightly lower from both Dec. 31, 2015 and 2014.

Fixed-charge coverage was 2.3x for the trailing 12 months (TTM) ended Sept. 30, 2016, and Fitch expects it to remain in the low 2x's area over the next 12-24 months. This level is appropriate for the rating.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for CBL include:

--SSNOI growth of 1% annual growth in 2016-2017;

--Development/redevelopment spend of $250-330 million annually in 2016-2017. The weighted average initial yield on cost for projects coming online is approximately 8%;

--Non-core asset sales totalling $40 million. The forecasted capitalization rate is 7%-9% given the lower-productivity nature of the assets;

--Recurring capital expenditures of $100 million annually in 2016-2017, reflecting the reduced real estate footprint given asset sales and lender givebacks.

RATING SENSITIVITIES

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

--Should Fitch's opinion of CBL's access to debt and equity capital fail to improve;

--Failure to execute the asset repositioning strategy as a result of weaker liquidity in, or unattractive valuations of lower-tier properties;

--Fitch's expectation of leverage sustaining above 7.0x (leverage before preferred stock for the TTM ended Sept. 30, 2016 was 6.5x);

--Fitch's expectation of fixed-charge coverage sustaining below 1.8x (coverage for the TTM ended Sept. 30, 2016 was 2.3x);

--Reduced financial flexibility stemming from sustained high secured leverage and/or significant utilization under lines of credit;

--Failure to maintain unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) around 2.0x (coverage was 1.9x as of Sept. 30, 2016).

While Fitch does not envision positive rating momentum in the near term, the following factors may have a positive impact on CBL's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6.0x;

--Fitch's expectation of fixed-charge coverage sustaining above 2.5x.

FULL LIST OF RATING ACTIONS

Fitch currently rates CBL as follows:

CBL & Associates Properties, Inc.

--Long-term IDR 'BBB-';

--Preferred stock 'BB'.

CBL & Associates Limited Partnership

--Long-term IDR 'BBB-';

--Senior unsecured lines of credit 'BBB-';

--Senior unsecured term loans 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: June, 16, 2016.

Additional information is available on www.fitchratings.com.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock based compensation and include operating income from discontinued operations and Fitch's estimate of recurring cash distributions from joint venture operations;

--Fitch has adjusted the historical and projected net debt by assuming the issuer requires approximately $25 million of cash for working capital purposes which is otherwise unavailable to repay debt;

--Fitch has included 50% of the company's cumulative perpetual preferred stock as debt for purposes of calculating certain leverage metrics.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/site/re/878264

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015959

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Fitch Ratings, Inc.
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or
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or
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Email: [email protected]

Source: Fitch Ratings

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