Moody’s credit rating group has given investors in some of the biggest names in shopping centres a timely head up about a possible pitfall from the mooted spin off of Coles by Wesfarmers.
Moody’s said in one of its weekly credit publications that the planned Coles de-merger will be “credit negative” for seven major Australian shopping mall trusts.
The warning comes a couple days after Moody’s said the planned Coles spin off would be credit negative for Wesfarmers.
“The demerger of Coles is negative from a credit perspective, due to the resulting reduction in scale, business diversification, and stability of earnings,” said Moody’s vice president and senior credit officer Ian Chitterer said.
“That said, Moody’s has affirmed Wesfarmers’ rating and left the outlook at stable as we expect that, in order to maintain its targeted A3 ratings, management will reduce leverage to compensate for these negative impacts,” Mr Chitterer said earlier this week.
Moody’s said on Thursday the demerger “would be credit negative for seven Moody’s-rated Australian real estate investment trusts (A-REITs) that have exposure to Coles as a landlord.”
Moody’s named those as Scentre Group (A2 stable), The GPT Group (A2 stable), Vicinity Centres (A2 stable), Stockland Group (A3 stable), Mirvac Group (A3 stable), Charter Hall Retail REIT (Baa1 negative) and Shopping Centres Australasia Property Group (Baa1 stable).
“Not all of these A-REITs disclose their rental income exposure to Coles, but among the ones that do, Coles contributes around 11% of Shopping Centres Australasia’s rental income and 4.3% of Vicinity’s rental income, Moody’s said in its note in one of its weekly credit publications.
“Coles leases space from trusts for its supermarkets, and although Coles directly signs those leases, its counterparty risk benefits from Coles being a 100%-owned subsidiary of Wesfarmers, which has multiple divisions and an AUD49 billion market capitalization.
“A demerger of Coles would be negative from the A- REITs’ perspective because historically if the Coles business came under financial pressure, Wesfarmers could have provided financial support to its subsidiary. After the demerger, this will no longer be the case,” Moodys said.
“The amount of revenue and EBIT that A-REITs generate from Coles leases is generally small but understates the importance of supermarkets as anchor tenants. Supermarkets are an important source of foot traffic for shopping centres and encourage patronage of specialty shops, which pay higher rent per square metre than anchor tenants such as supermarkets and department stores.
“If Wesfarmers follows through on its planned demerger, which it expects to occur in fiscal 2019, Coles would become a major standalone Australian listed company and be among the top 30 Australian Stock Exchange- listed companies.
“Although still large, a standalone Coles would be smaller than Wesfarmers.
“Furthermore, Wesfarmers has indicated that it expects Coles likely will have a standalone credit rating of Baa1, versus A3 for Wesfarmers. Coles would remain a strong credit counterparty, but not as strong as it is now.” Moody’s said.
