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Rating Action: Moody's downgrades Washington Prime's corporate family rating to Ca; outlook remains negative
Global Credit Research - 19 Aug 2020
New York, August 19, 2020 -- Moody's Investors Service, ("Moody's") has downgraded the ratings of Washington Prime Group, L.P., including its corporate family rating to Ca from Caa3 and its senior unsecured rating to C from Caa3. Washington Prime Group, L.P. is the main operating subsidiary of Washington Prime Group Inc. (collectively "WPG"). The speculative grade liquidity rating remains unchanged at SGL-4 and the rating outlook remains negative.
The ratings downgrade reflects WPG's modification of its credit facility agreement, which includes an immediate waiver of certain financial covenants (and less restrictive thresholds thereafter) in exchange for temporary partial collateral with release beginning in 3Q21 subject to certain conditions. Accordingly, WPG's unencumbered NOI will decline by approximately 50% to about 26-27% (from 54%) of total NOI (as of 1Q20), reducing its financial flexibility and coverage of its unsecured debt.
The downgrade also reflects WPG's substantial cash flow declines as the coronavirus is impacting its retail tenants' ability to pay rents. We expect the REIT to experience continued pressure as the weak retail environment prompts store closures that will have a disproportionate impact on its lower quality mall portfolio. WPG's limited liquidity and high leverage make it especially vulnerable to these operating risks, and the negative outlook reflects our view that the existing capital structure is unsustainable. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The following ratings were downgraded:
Issuer: Washington Prime Group, L.P.
- Senior unsecured debt to C from Caa3
- Corporate family rating to Ca from Caa3
The following ratings were affirmed:
Issuer: Washington Prime Group Inc.
- Preferred stock at C
- Preferred stock shelf at (P)C
- Preferred stock shelf non-cumulative at (P)C
Issuers: Washington Prime Group, L.P.; Washington Prime Group Inc.
- Outlooks remain negative
WPG's Ca corporate family rating reflects its large, geographically diversified portfolio of retail assets, which includes a mix of enclosed malls (63% of 2Q20 Comp NOI) and open-air centers (37%) across the US. The REIT's open-air portfolio is a key credit strength as it provides it with more stable, higher quality cash flows, offsetting challenges associated with its mall portfolio. WPG also benefits from solid fixed charge coverage and a modest number of unencumbered assets.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Washington Prime Group of the deterioration in credit quality it has triggered, given its exposure to the retail industry, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Key credit concerns include WPG's unsustainably high debt levels considering the deteriorating operating outlook. The REIT's total comp NOI declined 45% for 2Q20, as its retail tenants experienced substantial loss in sales due to temporary property closures forced by the pandemic. Even as most properties have now reopened, we expect weak sales trends to persist (particularly for mall tenants) as a result of the weak macroeconomic environment and accelerating competitive challenges related to the growth in e-commerce. We expect an increasing number of tenant bankruptcies and store closures will cause continued cash flow pressure for WPG in the coming months.
WPG's SGL-4 rating reflects its weak liquidity, limited access to capital, and the potential for it to breach its bond covenants, particularly the maintenance test related to its unsecured debt coverage. The REIT's liquidity is limited, as it effectively drew down the remaining capacity on its $650mm unsecured facility and had $144mm of cash as of the end of 2Q20. The REIT will need to access external capital and strengthen its financial position as it looks to refinance its revolver that has an original maturity date in December 2021 (plus two six-month extension options) and $350 million term loan due in December 2022. Positively, we note that WPG has suspended its common dividend, which will provide incremental capital to fund its strategically important development pipeline (in conjunction with modest outparcel sales).
The negative outlook reflects our expectation that WPG's existing capital structure is unsustainable given its escalating operating challenges and limited liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the REIT's weak operating outlook and liquidity risks, an upgrade is unlikely in the foreseeable future until Moody's sees signs of material growth in mall cash flows and stronger liquidity. WPG's ratings would likely be downgraded should its liquidity position further erode or if it were to execute a distressed exchange of its unsecured bonds.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Washington Prime Group Inc. [NYSE: WPG] is a retail REIT that owns a mix of enclosed malls and open air community centers across the United States. Gross assets totaled $7.7 billion including pro rata share of JVs as of 2Q20
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Lori Marks VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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