S&P reviews Novion for downgrade

Standard & Poor's said it placed its A/A-1 corporate credit ratings on Novion Property Group (formerly CFS Retail Property Trust Group) and its related debt on CreditWatch with negative implications following a proposal by Federation Centres to merge with Novion.

At the same time, the agency placed the long-term BBB+ corporate credit rating on Federation on CreditWatch with positive implications. The secured long-term debt issue of A- was also placed on CreditWatch positive.

The merged group will have direct property interests of about A$14 billion and a development pipeline of A$2.5 billion. Transaction costs of about A$460 million will be debt-funded, leading to the merged entity's gearing (net debt-to-net tangible asset) being about 31% upon completion of the merger. This level will be within the group's target gearing range of 25% to 35%, and consistent with the existing financial policies of both Federation and Novion.

"We expect that the merged group's asset quality, and hence competitive profile, will be somewhat lower than similarly rated peers due to Federation's weaker-quality portfolio," S&P credit analyst Parvathy Iyer said in a news release.

"This is because the merged group's portfolio quality would have a higher weighting to subregional and convenience assets. Also, the relatively high proportion of near-term lease expiry under the merged portfolio is seen as a weakness and could present some challenges under potentially difficult operating conditions."

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