Fitch Ratings: Lendlease Equity Raising Strengthens Liquidity Through Coronavirus Downturn

(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 28: Lendlease Corporation Limited's (BBB-/Stable) equity raising and additional banking facilities will strengthen its liquidity position and allow it to manage through the economic downturn resulting from the coronavirus-related shutdown measures in Australia and globally, says Fitch Ratings. This will assist the company in delivering its strong AUD112 billion development pipeline, although we expect some delays in realisation of this revenue. It will also protect the strength of Lendlease's balance sheet through a prolonged slowdown. As a result, the shutdown measures are unlikely to have any ratings impact on the company. Lendlease announced on 28 April 2020 that it is seeking to raise up to AUD1.15 billion in additional equity to strengthen its liquidity position. The equity raising comprises an AUD950 million fully underwritten institutional placement and up to AUD200 million through a non-underwritten security purchase plan to eligible shareholders. In addition, the company has secured AUD900 million in additional banking facilities with tenors of 12 to 24 months, subject to formal documentation with financiers being signed. This will bring Lendlease's pro forma liquidity position at 28 April 2020 to almost AUD4 billion. We believe this will enable Lendlease to manage through the downturn and deliver its development pipeline, as well as provide it with flexibility for potential investment and development opportunities. The company continues to pursue other options to further boost its balance sheet strength and shore up liquidity, including a PLLACeS transaction on its One Sydney Harbour residential development project, which has achieved AUD1.5 billion in pre-sales, and joint venture capital partnerships to reduce the future investment required to complete projects or monetise completed assets. However, we understand that the completion of the Engineering business's sale for AUD180 million could be deferred to the financial year ending June 2021 (FY21) as the parties to the sale continue to satisfy the remaining terms of the agreement, following approval from Australia's Foreign Investment Review Board. Lendlease has confirmed that its estimate of the costs to exit the Engineering and Services businesses of AUD450 million-AUD550 million remains appropriate. Fitch believes that Lendlease's revenue and cash generation visibility remains strong, although we expect realisation of construction revenue to decline in the short term as projects are halted or slowed due to lockdown measures. Lendlease has been required to shut down project sites due to lockdown measures in Singapore, Kuala Lumpur, Milan, New York City and Boston. It also had to temporarily stop work on its London projects to incorporate social-distancing requirements on worksites. However, we understand that agreed timelines to complete the projects have been extended to incorporate the effect of the shutdowns, where the shutdown is a result of government or regulatory actions or client actions. In addition, we believe that governments will continue to prioritise construction and infrastructure spend as they seek to minimise the economic impact of the measures undertaken. Therefore, we believe Lendlease's delayed revenue will be recouped. Settlements in the residential business could also be delayed due to later completions or buyers requiring additional time to secure financing, although there has not been an increase in defaults. Nevertheless, new sales have declined following the shutdown measures. We expect this segment of Lendlease's business to remain subdued until consumer confidence returns. In the meantime, the residential business will generate lower revenue. Lendlease's capital-light model will also help the company reduce its cash outflows and preserve its liquidity position, in particular regarding land payments. Over 90% of urbanisation projections and around 95% of land lots in the Communities development business have been secured on capital efficient terms, meaning that the company does not have significant fixed land payments, which it will be required to meet during the downturn. The company has also taken other measures to reduce cash outflows, including reducing senior executive salaries by around 20% and deferring non-essential capital and project expenditures. It has also delayed the determination of whether it will pay a final dividend in FY20. Fitch now expects Lendlease's leverage - defined as total adjusted net debt/operating EBITDAR - to improve to 1.7x by FYE20, reflecting the equity raising. We then expect leverage to deteriorate to 3.2x by FYE21 as revenue realisation is delayed, before improving to around 2.5x in FY22 and FY23, well below the level of 4.0x where we would consider taking negative rating action. Contact: Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. 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