S&P: VEREIT Inc. Upgraded To 'BB+' Following Equity Issuance And Debt Paydown; Outlook Positive
At the same time, we raised our issue-level rating on the company's senior unsecured debt to 'BBB-' from 'BB+'. The recovery rating is '2', reflecting our expectations for substantial recovery in the event of default, at the higher end of the 70% to 90% range.
"The upgrade reflects the faster-than-expected improvement in VEREIT's credit metrics. The company's recently upsized equity issuance raised proceeds of around $700 million and repaid amounts outstanding under its $300 million senior secured term loan facility and its $3.3 billion unsecured credit facilities. Over the past quarter, in addition to lowering leverage, VEREIT has refinanced $1.3 billion in upcoming debt maturities (due February 2017) at favorable interest rates," said credit analyst Anita Ogbara.
The outlook is positive. We expect VEREIT to maintain financial leverage at or near current levels and to continue to opportunistically sell assets to reduce debt, and strategically raise capital, including through its investment platform, Cole Capital. We expect full-year 2016 debt to EBITDA in the low 7x area, FCC in the high 2x area, and debt to undepreciated capital in the mid-to-high 40% range.
Upside scenarioWe could raise the ratings if the company continues to execute its business plan including resuming growth, strengthens its competitive position via effective capital deployment in acquisitions, and continues to maintain its leverage profile by applying asset sale proceeds (and some equity issuance) to reduce debt generating debt to EBITDA in the low-7x area, FCC above 2.5x, and debt to undepreciated capital remaining below 45%. Under this scenario, we also expect VEREIT to stabilize its asset portfolio and pursue a disciplined acquisition strategy to enhance its portfolio. While we have no reason to believe a settlement is imminent, we would incorporate an assumption about use of liquidity to settle outstanding litigation into our analysis for any upgrade.
Downside scenarioWe could revise the outlook to stable if VEREIT pursues a more aggressive than expected growth strategy, or funds a larger portion of future acquisitions with debt, faces difficulty for the remainder of its dispositions or if the company experiences issues with liquidity, possibly because of large litigation costs. This could occur if debt-financed acquisitions result in debt to EBITDA above 8x and FCC below 2x on a sustained basis.