S&P Global Ratings recently placed Brookfield Property Partners on credit watch and the result could be a reassignment to a speculative grade credit rating, meaning its bonds would be considered junk category.
"Brookfield Property Partners L.P.'s (BPY) fixed-charge coverage deteriorated to below 1.0x in the second quarter of 2023, and we don't forecast material near-term improvement given our economists' view that interest rates will remain higher for longer," S&P wrote. "The company also faces heightened refinancing risk, with a capital structure that has significant maturities over the next two years and outsized exposure to floating-rate debt."
"Brookfield Property Partners, through Brookfield Property Partners L.P. and its subsidiary Brookfield Property REIT Inc., is one of the world's premier real estate companies," according to S&P Global Market Intelligence, which lists the company's total assets at $130 billion.
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The company owns the owns class-A office and malls in major U.S. cities and is part of Canadian alternative asset manager Brookfield Corp. In July 2021, S&P downgraded Brookfield Property Partners L.P. to BBB- from BBB, the former being the lowest investment-grade credit rating S&P provides. Anything below that is in the speculative category, often referred to as junk.
"The CreditWatch negative placement reflects our expectation that we could lower the ratings on BPY, possibly by more than one notch, if we don't envision the company implementing a near-term plan to reduce refinancing risk and boost coverage levels," S&P says.
S&P pointed to "deteriorating credit protection measures" that are "unlikely to recover materially over the next two years."
As many other firms in commercial real estate, Brookfield Property Partners has significant amounts of financing debt maturing on its properties. However, higher interest rates, skyrocketing interest cap rates, and growing costs of operation present a challenge to getting favorable refinancing rates.
"While we acknowledge that BPY's sizable liquidity position and consistent execution of asset sales mitigate the risk of the company not being able to pay its fixed charges over the near term, BPY has one of the weakest financial risk profiles within our North America real estate coverage given elevated leverage and thin interest coverage," S&P wrote.
S&P says that the company retains good positions with lenders "due to its parent's scale and platform" and because of "the reluctance of banks to take back any commercial real estate assets secured by loans in the current market."
Banks will likely provide extensions, though at higher interest rates. "In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) are reducing asset values, we would expect BPY to hand back the asset to the servicer. As of June 30, 2023, BPY has suspended approximately 3% of its contractual payments on non-recourse mortgage debt."
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