Howmet Aerospace
UK engineered metal products
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UK builders merchant
Travis Perkins
Moving up within HY
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US office property company
Office Properties Income Trust
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US regional bank
New York Community Bancorp
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US ultra low cost air carrier
Spirit Airlines
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US office company
Hudson Pacific Properties
New fallen angels3
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German office REIT
Alstria
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French operator of hyper- and super-markets
ELO (Auchan Holding)
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US aluminium producer
Alcoa
Moving deeper into HY
Now rated
BB+
Cut one notch by S&P in January 2024
The company is exposed to a challenged sector (offices) in a particularly challenged geographic area (San Francisco). With a high proportion of its leases coming up for renewal by 2025, there is clearly a high chance of earnings disappointment. However, solid liquidity and a substantial unencumbered quality asset base means we do not consider the name to be a falling knife, but will monitor developments, particularly on the leasing side, very carefully.
LOIM's longer-term view
A combination of operating pressure and weak financial metrics drove the downgrade. For instance, office occupancy has declined significantly and more than a third of leases are expiring by the end of 2025. The company also had a high ratio of debt to EBITDA and fixed charge cover of 1.9x. In mitigation, HPP has a high-quality office and studio portfolio, solid liquidity and USD 700 million in proceeds due from the sale of Westside developments, which will be used to reduce debt. S&P's bond rating benefits from a one notch uptick to BB+ due to an expected elevated recovery level of circa 75%, which reflects the high quality, unencumbered nature of the property portfolio and supportive bond covenants.
Ratings rationale
Hudson Pacific Properties
This triggered a downgrade of a single, investment-grade EETC bond (4.1% 04/01/28) to BB+
Issued in 2015 for just USD 256 mn, the bond is old, small and highly illiquid, therefore limiting the investment opportunity, in our view.
LOIM's longer-term view
Enhanced Equipment Trust Certificates (EETC) are bankruptcy-remote bonds secured by part of the airline’s fleet and, therefore, rated materially higher than the underlying issuer.
In this case, the company’s asset base is attractive and the amortising nature of the bond means that the asset coverage is increasing over time, which is positive for the credit.
Ratings rationale
LOIM's longer-term view
Ratings rationale
The bonds were downgraded a further four notches by Moody’s to B3 NegativeWatch in March 2024
The subordinated bonds of FBC (4.125% 11/01/30 ) were cut to Ba2 by Moody’s and placed on negative watch in February 2024
The bonds suffer from poor liquidity and a small issue size, especially in light of pronounced uncertainty. This limits potential prospects, in our view.
LOIM's longer-term view
NYCB is one of the largest regional banks in the US, with operations in multi-family lending, mortgage origination and servicing, and warehouse lending. In 2022, NYCB acquired several assets and liabilities from Signature Bank, increasing its balance-sheet size and triggering a regulatory requirement. The bank is now subject to enhanced prudential standards, i.e. risk-based and leverage-based capital requirements along with liquidity standards and stress testing. In order to comply with these requirements the bank significantly cut its dividend and increased its allowance for credit loss provisioning, leading to the shares plunging on the day of the announcement. NYCB has since issued a statement to delay its 10-K reporting as it discovered “material weakness” in how it tracks loans.
Ratings rationale
Parent of Flagstar Bank Corp (FBC)
Now rated:
Ba1 S
Cut one notch by Moody's in December 2023
The company benefits from a long operating history and a well-diversified tenant base. Vornado’s lease maturity profile is well-spread and valuable. It holds an unencumbered asset base concentrated primarily in New York (which generates 85% of net operating income) and in San Francisco. It has a strong liquidity position.
LOIM's longer-term view
The downgrade reflected:
The company’s high leverage
A difficult leasing environment for US office space
Challenging financing conditions
Ratings rationale
Vornado Realty
Cut to BB+ by Fitch in March 2024, stable outlook
We believe Alcoa will be able to stabilise and improve its operational performance within the BB rating range.
Our view is based on Alcoa’s: • Leading positions in bauxite, alumina and aluminium • Its upper quartile cost position • The flexibility offered by its scale of operation • Its good access to the capital markets
LOIM's longer-term view
The company’s financial metrics are expected to be below that required for an investment grade rating for a number of years.
This is due to a combination of cost inflation, weak profitability and specific mine-related operational setbacks resulting in the need to restructure some operational sites.
Ratings rationale
Alcoa
LOIM's longer-term view
Ratings rationale
S&P cut to BB+ in March 2024, with stable outlook
ELO’s asset-heavy balance sheet – with ~EUR 7 billion in rental-generating real estate assets from New IMMO Holdings and ~EUR 4 bn in liquidity – provides substantial flexibility and gives the company the time needed to turn around the business. New IMMO Holdings is also a bond issuer and was downgraded in line with ELO. We note its standalone rating quality suggests it would have an investment grade rating. Going forward, we will be monitoring ELO’s plans to revitalise its French operations as well as the success of integrating and turning around the Casino stores, which we expect will take a number of years.
LOIM's longer-term view
The company’s weaker financial metrics follow ongoing structural challenges in the French retail market as well as the acquisition of 98 loss-making stores from Casino.
Profitability in French retail operations (which account for ~ 50% of global operations) has declined year on year since 2021, reflecting increasing competition in the sector. The impact on ELO was exacerbated by its larger exposure to the more challenged hyper-market format and its greater reliance on non-food sales.
More supportively, shareholders delivered a EUR 300 mn capital increase and accepted a cessation of dividend payment.
Ratings rationale
ELO (Auchan Holding)
LOIM's longer-term view
Ratings rationale
Cut one notch to BB+ by S&P in March 2024, outlook negative
Operationally the business remains sound with inflation-linked rental contracts, a high proportion of public tenants, occupancy around 90%, and a weighted average lease term in excess of five years.
Liquidity is adequate over the next twelve months but management need to address the EUR 400 mn bond that matures in Sept-2025 before it becomes current (less than 12 months maturity).
Brookfield Asset Management owns 95% of the business and while the rating does not incorporate any expectation of support from this source, we note Brookfield has recently provided additional equity support to UK-based office real estate company, Canary Wharf.
LOIM's longer-term view
The downgrade followed a larger-than-expected devaluation of Alstria’s portfolio. Coupled with an increased interest burden following successful refinancing, this resulted in financial metrics being below those required for an investment-grade rating.
Ratings rationale
Alstria
LOIM's longer-term view
Ratings rationale
Cut to BB+ by Fitch in March 2024, with stable outlook
We have always struggled to view Travis Perkins as an investment-grade business because it operates in a very cyclical sector within a single economy (the UK).
However, the company’s management has a strong track record of steering it through the cycle with sufficient liquidity. It has no material debt maturities in the near term and we expect it to stabilise at the current rating.
LOIM's longer-term view
The company’s credit metrics are expected to be below that required for an investment grade rating until 2026.
The operational environment remains challenging, with weak demand, poor pricing power and wage/cost inflation. It will only be partially mitigated by Travis Perkins’s cash-saving measures.
Ratings rationale
Travis Perkins
LOIM's longer-term view
Ratings rationale
Left the fallen-angel universe in December 2023
Absent a renegotiation of the bank line, probably to a secured structure, and concrete proposals to refinance bonds maturing in 2024 and 2025, some form of debt restructuring is likely.
Our initial review identified our concerns when the issuer became a fallen angel.
LOIM's longer-term view
Despite operational performance being reasonably robust, the company did not refinance its USD 700 mn bank line, which was due in January 2024, and was drawn to USD 200 mn. The downgrades were driven by management’s failure to address these liquidity concerns coupled with an unclear strategy and financial policy.
Ratings rationale
Office Properties Income Trust
LOIM's longer-term view
Ratings rationale
Worthington Industries
Now rated:
Ba1 PO/BBB- S/BBB S
S&P ha innalzato il rating di un notch a dicembre 2023
Expected to stabilise at mid-to-low BBB going forward.
LOIM's longer-term view
La redditività è migliorata grazie a una domanda di componenti aerospaziali commerciali forte e costante. La politica finanziaria di sostegno della società ha ulteriormente contribuito a rafforzare i parametri creditizi.
Ratings rationale
Howmet Aerospace
LOIM's longer-term view
Ratings rationale
Office Properties
Downgraded to Ba1 by Moody’s in November 2022 and sequentially to Caa1 over the next 12 months.
Downgraded two notches to BB by S&P in March 2023 followed by further down-grades over the next six months to CCC+
Left the fallen-angel universe in December 2023
New fallen angels2
Now rated:
Caa1 NO/CCC+ NW/NR
Hudson Pacific Properties
Spirit Airlines
Cut by all three agencies in January 2024
New York Community Bancorp
The subordinated bonds of FBC (4.125% 11/01/30 ) were cut to Ba2 by Moody’s and placed on negative watch in February 2024
The bonds suffer from poor liquidity and a small issue size, especially in light of pronounced uncertainty. This limits potential prospects, in our view.
NYCB is one of the largest regional banks in the US, with operations in multi-family lending, mortgage origination and servicing, and warehouse lending. In 2022, NYCB acquired several assets and liabilities from Signature Bank, increasing its balance-sheet size and triggering a regulatory requirement. The bank is now subject to enhanced prudential standards, i.e. risk-based and leverage-based capital requirements along with liquidity standards and stress testing. In order to comply with these requirements the bank significantly cut its dividend and increased its allowance for credit loss provisioning, leading to the shares plunging on the day of the announcement. NYCB has since issued a statement to delay its 10-K reporting as it discovered “material weakness” in how it tracks loans.
The company’s financial metrics are expected to be below that required for an investment grade rating for a number of years.
This is due to a combination of cost inflation, weak profitability and specific mine-related operational setbacks resulting in the need to restructure some operational sites.
