Moody's Investors Service lately affirmed Ronesans Gayrimenkul Yatirim (RGY), one of the largest retail-focused commercial property companies in Turkey, at B2/Negative, five notches below investment grade, according to a notification from the rating agency.

However, at the same time, Moody's downgraded Ronesans’ $300mn of senior unsecured notes due 2023 from B2 to B3/Negative, taking the notes to six notches below investment grade.

The downgrading of the senior unsecured notes to B3 reflected a growing structural subordination to a significant amount of secured debt and heightened risk to external vulnerabilities which have resulted in a deterioration of credit metrics, Moody’s said.

The impact of coronavirus (COVID-19) lockdowns and the year-to-date depreciation of the lira by 27% against the euro as of September 29 weakened Ronesans' credit profile beyond Moody's expectations.

Moody's said adjusted net debt/ebitda increased to 18.6x as of end-June from 12.8x at end-2019. Although the credit metrics would improve by 2021, they remained susceptible to further depreciation of the lira or another temporary closure of shopping centres, to which Ronesans has limited operational flexibility to respond, it added.

Positively, Ronesans’ sizable cash balance of €136mn, provided a certain amount of liquidity buffering for the next 12 months, the ratings agency said. In addition, Ronesans has short-term forward hedges which will to a degree reduce the currency risk over the period.

Structural mismatch

However, exposure to longer-term currency risks remained because of the structural mismatch between the foreign currency debt, at 92% of total debt, and Turkish lira rental income, Moody’s warned.

Government-imposed lockdowns caused by the pandemic have had a negative impact on real estate companies globally, particularly segments including shopping centre operators.
 

Shopping malls in Turkey suffered a lockdown that lasted m ore than two months. Pictured is the Istanbul Cevahir Shopping and Entertainment Centre (Image: Dosseman, wiki).

In Turkey, shopping centres were closed from March 20 to May 30 during which time Ronesans did not charge rent, leading to a sharp decline in cash flows during the second quarter of 2020.

Since reopening in June, footfall and tenant turnover have rebounded and while Ronesans has maintained its high occupancy rates at round 95%, it has been at the expense of offering discounts on rents.

Return to normal

Moody's expected management to gradually remove the discounts by the fourth quarter of 2020 as tenant turnovers return to normal.

The B2 rating reflects the dominant secured debt class in the capital structure, equating to 74% of total outstanding debt.

Moody’s added: “It further factors the high-quality and largely encumbered retail property portfolio in prime locations with good access to public transport across Turkey; cash flow from contractual rental income, underpinned by a diversified tenant base with a long weighted average lease expiry profile of 6.7 years; a track record of high occupancy rates; limited tenant concentration; and no development risk.

“At the same time, the rating factors Ronesans’ predominant exposure to the retail sector; limited number of properties and geographic concentration in Turkey which is facing difficult macro-economic conditions, exacerbated by the COVID-19 pandemic during the first half of 2020.”

The B3 rating on the notes is one notch below Ronesans’ corporate rating, reflecting their unsecured position relative to the significant amount of secured debt in the capital structure as well as the decline of the unencumbered asset cover, Moody’s said.

Unencumbered assets comprised of mostly land, offices and two retail shopping centres, with the remaining 10 shopping centres encumbered.

Sizeable debt coming due

Ronesans has a sizeable amount of debt coming due in 2021, amounting to €293mn-equivalent. Debt coming due in 2022 is €205mn-equivalent.

Moody's said it understood that Ronesans has made some progress toward refinancing some of the debt due in 2021, notably its €89mn debt secured by Optimum Adana.

Also, it added, the refinancing risk on the €109mn of joint venture debt maturing in the fourth quarter of 2021 should be manageable because of the high-quality assets securing the debt and the strong partner, Government of Singapore Investment Corporation (GIC).

The corporate family rating of B2 is at the same level of Turkey's foreign currency ceiling as well as the B2 sovereign ratings.

Moody’s said: “Ronesans’ rating could be downgraded if liquidity becomes inadequate or if the fixed-charge coverage sustainably deteriorates as a result of, among other things, greater weakness of the lira against the euro or weak rental growth.”

12 dominant shopping centres

Ronesans has a total portfolio value of €2.2bn (stake adjusted for JVs) in Turkey, noted Moody’s. The property portfolio comprises of 12 dominant shopping centres of which three are a 50/50 joint venture with GIC, and four offices, it said.

The company also has 10 land bank plots for future development opportunities valued at €204mn.

Ronesans is a subsidiary of Ronesans Emlak Gelistirme Holding, a 100% subsidiary of Ronesans Holding that holds investments in construction, energy and property ownership and development.

Ronesans Emlak holds 74.2% of Ronesans, with GIC holding 21.4% and management holding the balance.

For the 12 months ending June 30, Ronesans’ reported revenue amounting to to Turkish lira (TRY) 722mn (€107mn), while Moody's adjusted ebitda was TRY505mn (€75mn).

In April, Fitch Ratings downgraded Ronesans to B+/Rating Watch Negative, four notches below investment grade and one notch below Turkey’s BB-/Negative sovereign rating, from BB-.