(The following statement was released by the rating agency) Fitch Ratings-Sydney-January 31: Fitch Ratings has affirmed Australia-based Lendlease Corporation Limited's Long-Term Issuer Default Rating at 'BBB-'. The Outlook is Stable. A full list of rating actions follows at the end of this commentary. The affirmation and Stable Outlook reflects the strength of Lendlease's underlying core businesses despite a reduction in the company's financial resilience on account of writedowns and provisions associated with the now sold engineering business. Fitch's expects that Lendlease's leverage - measured by total adjusted debt/operating EBITDAR - will likely peak at 3.0x in the financial year ended June 2021 (FY21), from 2.6x in FY19, reflecting the working capital impact of the engineering sale. Lendlease continues to expand its development pipeline, both in Australia and overseas - reaching almost AUD100 billion at FYE19 including the San Francisco Bay area project that was won in July 2019 - as well as its Investments business, which has seen funds under management (FUM) grow to AUD35.2 billion and investments of AUD3.7 billion at FYE19 (FYE18: AUD30.1 billion and AUD3.4 billion, respectively). We believe that the sale of the Engineering business is positive for Lendlease's business profile, as it will limit its exposure to the risks inherent in this more complex division. The sale agreement excludes the underperforming NorthConnex and Kingsford Smith Drive projects, which were key drivers of the provisions taken in FY19, but these projects were at least 90% complete as of 19 December 2019, minimising the potential for further losses. However, pending ongoing negotiations, the company is likely to remain exposed to risks on its Melbourne Metro project, which is in its initial stage. Nonetheless, Lendlease has reiterated that it expects the estimated AUD450 million - AUD550 million in restructuring costs, which includes the cost to exit customer contracts, are sufficient to cover the retained projects' total costs. Key Rating Drivers Strong Financial Profile Despite Setback: Lendlease has stated that it expects its company-defined gearing - net debt/total tangible assets less cash - to increase to between 15% and 20% in FY20, as a result of the negative working capital transfer on the sale of its Engineering business and its capital budgeting plans for FY20. This is at the higher end of its 10%-20% announced target. This elevated gearing will see our measure of leverage peaking at 3.0x by FYE21, which remains within our guideline of 4.0x, where we may take negative rating action. We believe that the inherent strength that Lendlease has built into its balance sheet has enabled the company to absorb both the write-down and the working capital transfer in its Engineering business. However, its low leverage prior to the announcements - below its target range at 9.9% at FYE19 reflecting a number of projects nearing the end of their development cycle, which is typically highly cash generative - allowed it to maintain its credit metrics within both its and Fitch's guidelines. Flexibility to Absorb Restructuring Costs: Fitch expects the company to continue to ensure the strength of its balance sheet is maintained as it incurs around a company-estimated AUD450 million to AUD550 million in restructuring costs over the next several years as it exits its Engineering and Services businesses. Lendlease had already increased its committed undrawn facilities to AUD2.5 billion in FY19, and still has other actions available to it, including capital recycling opportunities, a strong development pipeline, a solid underlying performance, among other actions, which it can use to shore up its balance sheet. The company also continues to seek a buyer for the Services business, which will generate further cash inflows. Leadership, Diversification, Scale Drive Ratings: Lendlease has a market-leading position in most of its businesses, which include residential, commercial, retail and infrastructure development, construction and investment management in Australia, the UK, the US and Asia. Recent project wins, particularly in its European and Americas development businesses, have seen the company's development exposure to Australia decline, as it focuses on increasing its pipeline in its target global gateway cities. This large and increasing scale - with a development pipeline of around AUD100 billion (including the San Francisco Bay area project) and core construction backlog revenue of AUD16 billion at FYE19 - supports the company's rating. Global Urbanisation Supports Growth: Fitch believes that Lendlease's successful expansion of its urbanisation business globally will become the main factor driving demand for the company's services as it nears completion of the realisation of its record pre-sold residential property revenue in Australia, which has supported the company's growth since 2008. The development pipeline's CAGR of 17% to FYE19, from FYE14, was driven by its urbanisation pipeline, which had CAGR of 23% over the same period. The urbanisation pipeline now makes up around 85% of Lendlease's total development pipeline following project wins, valued at around AUD27 billion, in Milan, Chicago and Sydney in FY19 and San Francisco in July 2019. In December 2019, it also secured the AUD15 billion Thamesmead project in the UK. Capital Light Projects Reduces Investment: Lendlease's ability to utilise various land payment models, such as staged payments or land management, reduces the cash investments required to sustain or expand the company's businesses - particularly the large scale projects in its urbanisation pipeline. At FYE19, only five of the company's 21 major urbanisation projects required upfront land payments. Fitch believes that this reduces the cyclicality of Lendlease's cash generation cycle - which has historically been lumpy as it depends on project commencement and completions - and has enabled the company to continue to win and fund larger projects globally. This is despite the rise in its credit metrics following the losses in its Engineering and Services business. Strong Recurring Earnings: The company's Australian Retirement Living, US military housing and Investment Management business generate stable and predictable revenue, which supports its credit profile. These businesses accounted for around AUD690 million in EBITDA in FY19 and are likely to represent around 35%-45% of EBITDA going forward. Fitch expects the company's revenue sources to become more diversified as it manages the capital allocation to its Investments segment to include telecommunications infrastructure and built-to-rent apartments, in which it has already announced investments. Strong Order Book, Earning Visibility: Lendlease had FUM of AUD35 billion and investments of around AUD4 billion at FYE19, apart from its strong development pipeline and construction backlog revenue. Fitch expects project completion and rising FUM to drive revenue over the next 12 months. Lendlease has a pipeline of around 27,000 zoned apartments not yet in delivery - more than a 20-year supply - and is focusing on urban regeneration projects globally to maintain order-book strength. Derivation Summary Lendlease's rating is driven by its exposure to the cyclical residential and construction sectors, and the associated mismatch between investment outflows and cash receipt on its projects, which typically last longer than a year. This balances the benefits from the company's recurring revenue stream in its investment business, which provided interest coverage of 3.1x in FY19. Lendlease's recurring EBITDA interest coverage is higher than that of its peer, Hong Kong-based Nan Fung International Holdings Limited (BBB/Stable). However, Nan Fung has large financial assets and low leverage, defined as total adjusted net debt/operating EBITDAR, of -0.7x at the financial year ended March 2017, while Lendlease's leverage rose to 2.6x by FYE19 as a result of its losses in its engineering business. We expect Lendlease's leverage to rise again by FYE21 as it completes the sale of its engineering business and commences projects in its growing global development pipeline. Thereafter, we expect growth in the company's core business and various capital recycling opportunities to help support Lendlease's balance sheet strength. Lendlease's adjusted net cash/operating EBITDAR leverage and recurring EBITDA interest coverage are comparable with that of Australian peer, Downer EDI Limited (BBB/Stable). Downer has lower exposure to cyclical cash flow as recurring maintenance-style projects have increased as a proportion of its project portfolio. However, we note that Lendlease's recurring EBITDA is likely to rise as capital allocated to its investment business continues to increase. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - FUM to increase by around 5% a year from FY20 to FY23 (FY19: 17%). - Reported pre-sold apartment revenue of AUD2.5 billion to be realised in FY20 and FY21, in line with company guidance. - Apartment settlements to decline to the lower end of the announced target of 1,000 to 2,000 a year. Community settlements to decline to the lower end of the announced target of 3,000 to 4,000 a year. - Dividend payout ratio to be at the higher end of 40%-60% of net profit after tax guidance. - Engineering sale to be completed by FYE20 and AUD450 million negative working capital balance to be transferred during the year, in line with company guidance. - Restructuring costs of AUD535 million to be incurred over FY20-FY22 (AUD15 million incurred in FY19). RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Recurring EBITDA (defined as EBITDA from the investment segment per Lendlease's financial reports)/gross interest expense increasing to above 3.0x (FY19: 3.1x) on a sustained basis. - Adjusted net debt/operating EBITDAR falling below 2.5x (FY19: 2.6x) on a sustained basis. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Recurring EBITDA/gross interest expense falling below 1.5x on a sustained basis. - Adjusted net debt/operating EBITDAR increasing to above 4.0x on a sustained basis. Liquidity and Debt Structure Adequate Access to Capital Markets: Lendlease has capital market issuance in each region it operates - Australia, the UK, the US and Singapore. It also establishes bank debt and bank guarantee facilities as required - as in FY19 when it increased and extended its committed facilities following the write down in its Engineering business. Undrawn facilities were AUD2.6 billion at FYE19 (FYE18: AUD1.8 billion), including a AUD1.8 billion syndicated multi-option facility (AUD0.9 billion maturing December 2021 and AUD0.9 billion maturing in September 2022), a GBP400 million club bank facility (maturing March 2023), which was drawn to AUD145 million, and a new AUD960 million syndicated loan facility (maturing March 2024), which was drawn to AUD725 million. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch has reassessed Lendlease's management strategy score under our ESG framework, revising it to 4 from 3. The score of 4 reflects the losses that were incurred in the Engineering business and subsequent decision to exit this business, but which had no impact on the IDR. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. Lendlease Corporation Limited; Long Term Issuer Default Rating; Affirmed; BBB-; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; BBB- Lendlease Finance Limited ----senior unsecured; Long Term Rating; Affirmed; BBB- Lendlease (US) Capital Inc. ----senior unsecured; Long Term Rating; Affirmed; BBB- Lendlease Europe Finance plc ----senior unsecured; Long Term Rating; Affirmed; BBB- Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325
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. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10109323 Solicitation Status https://www.fitchratings.com/site/pr/10109323#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.