S&P Places LSCM Notes on CreditWatch Negative
Standard & Poor’s placed all notes issued by Land Securities Capital Markets (LSCM) on CreditWatch Negative today, the rating firm said in a release.
On March 31, LSCM’s priority 1 debt (P1D) loan-to-value (LTV) ratio was 58.1%. The LTV ratio for all LSCM debt was reported as 76.7%.
S&P believes there are two predominant factors that caused the leverage to increase.
First, the value declines of U.K. commercial property markets have reduced the market value of the underlying portfolio. Second, LSCM increased its total indebtedness by drawing down 1.1 billion from existing bank facilities earlier this year.
These funds were lent on an unsecured basis to entities that form part of the Land Securities Group (LSG) but are not secured in favor of the noteholders.
S&P said today’s rating actions reflect concern for LSCM’s  increased leverage. Additionally, it also shows that further deterioration in U.K. property values is likely, which may further increase the firm’s debt.
If LSCM’s leverage remains at current levels, this would not be consistent with its ‘AA’ rating, S&P reported, and, while recognizing it is not LSG’s intention to reduce LSCM’s leverage, LSG has made no form proposal.
S&P also noted that LSG has reported 1.6 billion of cash and unencumbered assets with a market value of 560 million held outside the security group.
The initial analysis of the ratings agency had contemplated a P1D LTV ratio of 45% to reflect the flexibility of the structure, which allows the borrower to incur additional senior ranking bank debt.
S&P acknowledged that this advance rate may change over time with the evolution of the real estate cycle, but it currently feels a P1D LTV ratio of 50% would be more consistent with the ‘AA’ rating.
The CreditWatch placement is expected to be resolved by the middle of September, the rating agency said.

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