S&P Global Ratings said it is considering cutting Brookfield Property Partners to junk status because the commercial property company has “substantial” amounts of maturing debt to refinance during a time of higher interest rates and lower property values.
(Bloomberg) — S&P Global Ratings said it is considering cutting Brookfield Property Partners to junk status because the commercial property company has “substantial” amounts of maturing debt to refinance during a time of higher interest rates and lower property values.
The commercial property unit of Brookfield Corp., the Canadian alternative asset manager, mostly owns high-quality office properties in major US cities and class-A malls. The value of these types of properties has dropped since the pandemic, according to real estate analytics firm Green Street.
Borrowing costs have soared since the Federal Reserve started raising interest rates last year to control inflation, driving down commercial property prices. Office prices have declined 31% from their 2022 peak, according to Green Street.
S&P had cut Brookfield Property’s issuer credit rating to BBB-, just one rung above junk, in July 2021. The ratings company has placed it on credit watch with negative implications, which means that there’s a 50% chance the rating could change within 90 days.
“The CreditWatch placement reflects the company’s deteriorating interest coverage metrics, continued secular challenges facing the company’s office properties, and a capital structure with a material amount of near-term, floating-rate debt,” S&P analysts Michael Souers and Ana Lai wrote.
A further rating reduction would increase the cost of future borrowing, because lenders would demand higher compensation for the added risk.
“This designation relates to a specific entity and has no impact on either the pricing or ability of Brookfield to access the real estate capital markets,” Kerrie McHugh, a Brookfield spokesperson, said in an email.
About 45% of Brookfield Property’s debt is floating rate, which subjects properties that don’t need imminent refinancing to higher costs. S&P’s note didn’t specify how much debt Brookfield needs to refinance in the next two years.
Brookfield has defaulted on office-building loans in New York, Los Angeles and Washington, DC, as well as one of the largest malls in San Francisco this year. It has suspended payments on about 3% of its contractual obligations on non-recourse mortgage debt, according to the ratings service. While S&P considers this a portfolio management exercise by the firm, it could view it more negatively if loan defaults become frequent, its note said.
The size of the parent corporation and “the reluctance of banks to take back any commercial real estate assets secured by loans in the current market” makes it likely that lenders, in many cases, will agree to extend the maturing debt for Brookfield Property Partners, the analysts wrote. Banks, the largest source of financing for commercial property, have cut back on loans after facing higher regulatory scrutiny stemming from the failure of a handful of lenders earlier this year.
Brookfield Property had $130 billion in total assets as of June 30, 2023 and is the largest real estate company that S&P rates by total assets.
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