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S&P Lowers its Outlook from Positive to Stable on Goodman Group: Confirms our HOLD recommendation

S&P revised last week Goodman Group’s outlook from Positive to Stable, while at the same time confirming its BBB long-term corporate credit rating.

The change of outlook is due to the rating agency’s assessment that Goodman’s financial policy won’t be as financially conservative and would be prepared to increase its look-through gearing to 40-45% in certain circumstances.

The rating agency in its assessment emphasizes that “while Goodman targets a look-through gearing range of 30-40% (equivalent to 25-35% statutory gearing), it is prepared to take gearing temporarily above this level if asset acquisition opportunities arise or if a severe deterioration in property market conditions causes a decline in asset values.” The agency is worried that the company could “raise its leverage from current levels through the property cycle to fund acquisitions, moderately increase development activity or potentially to fund shareholder remuneration”.

While we find this decision slightlt preemptive on behalf of S&P (as the group has not increased its gearing as yet) it is in line with our assessment of Goodman PLUS Trust. When we wrote in our research report that “Given the significant investments under way and the development pipeline, we expect any improvements in credit metrics to come from an increase in earnings rather than from debt repayments through cash-flows. The group has plenty of room in its financial covenants (gearing of 28% versus covenant level of a maximum of 55% and interest cover ratio of 5.9x versus covenant minimum level of 2x), so it could potentially raise further debt, which would subordinated further Goodman PLUS holders” and justifies why we are not giving the PLUS a BUY recommendation and just a HOLD.