Fitch Rates CBL & Associates' $300MM 4.60% Senior Unsecured Notes Due 2024 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns a credit rating of 'BBB-' to the $300 million senior unsecured notes due 2024 issued by CBL & Associates Limited Partnership, a subsidiary of CBL & Associates Properties, Inc. (NYSE: CBL). The notes have an annual coupon rate of 4.60% and were priced at 99.975% of the principal amount to yield 4.603% to maturity or 220 basis points (bps) over the benchmark rate.

CBL expects to use the net proceeds to reduce amounts outstanding under the company's revolving credit facilities and for general corporate purposes.

Fitch currently rates CBL as follows:

CBL & Associates Properties, Inc.

--Issuer Default Rating (IDR) 'BBB-';

--Preferred stock 'BB'.

CBL & Associates Limited Partnership

--IDR 'BBB-';

--Senior unsecured lines of credit 'BBB-';

--Senior unsecured term loans 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect CBL's large, well-diversified portfolio of predominantly regional mall assets, appropriate leverage and fixed-charge coverage for the rating, and adequate financial flexibility supported by a growing pool of unencumbered assets and improving access to unsecured debt capital.

These strengths are tempered by challenging growth prospects in CBL's lower-productivity malls, elevated secured leverage, and execution risk associated with the company's asset repositioning strategy over the next several years.

'ONLY GAME IN TOWN' STRATEGY

The average CBL property is located 26 miles from its nearest major competitor and 90% of mall net operating income (NOI) is derived from market-dominant or only game in town malls. This middle-market strategy creates NOI stability and provides barriers to entry given the modest populations in these regions generally do not support multiple regional malls or major retail centers. The company's ongoing redevelopment strategy also enhances asset quality and deters new competition from entering respective markets.

SOLID DIVERSITY BY GEOGRAPHY AND TENANT

St. Louis is CBL's largest market at only 8.1% of 2013 revenues, while the top five markets generated 20.7%. Limited Brands is the company's largest tenant, having generated 3.2% of annualized revenues at June 30, 2014 with the top 10 generating only 20.2%. Further, more than 71% of revenues are generated from tenants that individually contribute less than 1% of annual revenue. This granularity insulates CBL's cash flows from regional economic weakness and credit risk at the tenant level.

UNDERPERFORMANCE RELATIVE TO 'CLASS A' PEERS

CBL's same-store NOI (SSNOI) growth underperformed its mall REIT peers by 160 basis points (bps) on average over the past 10 years (1% vs. 2.6%). Underperformance has been somewhat secular though, as broader 'Class B' operators have underperformed 'Class A' landlords by 260 bps during this span, highlighting the lower growth prospects and recent operational challenges for lower-productivity centers. Favorably though, CBL outperformed its 'B' mall peers by 90 bps on average.

TENANT REPLACEMENT STRATEGY AUGMENTS GROWTH

Small-shop leasing spreads increased 10.5% during the first half of 2014, driven by a 32.2% improvement on new leases and 3.1% on renewals. CBL's tenant replacement strategy drove outsized growth on new leases, replacing weaker-performing retailers on short-term, percentage-heavy rents with tenants generating higher sales productivity. Fitch views this strategy favorably despite the downtime that can arise prior to new tenants occupying the space.

CBL's SSNOI growth was 1.9% in 2Q14, which was inline with management's 1%-2% forecast. Fitch expects 1.5% SSNOI growth in 2014 driven by the commencement of new leases and contractual rent escalators.

INVESTMENT-GRADE CREDIT METRICS

CBL's leverage was 6.7x at June 30, 2014, flat from 6.7x at both Dec. 31, 2013 and 2012. Fitch expects that leverage will trend toward 6.3x by 2016, driven by low single-digit SSNOI growth and asset sales, including over-levered assets that are likely to be conveyed to lenders.

Fixed-charge coverage was 2.2x for the trailing 12 months (TTM) ended June 30, 2014 and is expected to remain around this level over the next 12-24 months. Fitch defines fixed-charge coverage as recurring operating EBITDA, less recurring capital expenditures and straight-line rent adjustments, divided by total interest incurred and preferred dividends. Projected credit metrics are appropriate for the 'BBB-' rating.

ADEQUATE LIQUIDITY AND UNENCUMBERED ASSET PROFILE

CBL has adequate base case liquidity of 1.0x from July 1, 2014-Dec. 31, 2016. Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources of liquidity include unrestricted cash, availability under the unsecured revolving credit facility pro forma for the 2024 notes offering, and projected retained cash flow from operating activities after dividends. Uses of liquidity include pro-rata debt maturities, expected recurring capital expenditures, and remaining development costs.

The company's unencumbered asset coverage of unsecured debt at June 30, 2014 (calculated using a stressed 9.0% cap rate on June 30, 2014 unencumbered NOI) is adequate for the rating at 1.94x. Fitch expects that coverage will remain stable over the next 12-24 months as the company continues to transition to an unsecured-focused debt strategy.

RATING SENSITIVITIES

The following factors may have a positive impact on CBL's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6.0x (leverage at June 30, 2014 was 6.7x);

--Fitch's expectation of fixed-charge coverage sustaining above 2.5x (coverage for the TTM ended June 30, 2014 was 2.2x);

The following factors may have a negative impact on the company's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining above 7.0x;

--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;

--Reduced financial flexibility stemming from sustained high secured leverage and/or significant utilization under lines of credit;

--Failure to maintain unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) around 2.0x;

--Failure to execute the asset repositioning strategy as a result of weaker liquidity in lower-tier properties.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Rating U.S. Equity REITs and REOCs (Sector Credit Factors)' (Feb. 26, 2014);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013).

Applicable Criteria and Related Research:

Criteria for Rating U.S. Equity REITs and REOCs -- Effective Feb. 26, 2013 to Feb. 25, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891735

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Contacts

Fitch Ratings
Primary Analyst
Boris Alishayev, +1 212-612-7880
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks, +1 212-908-9161
Managing Director
or
Committee Chairperson
Daniel Chambers, +1 212-908-0893
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Boris Alishayev, +1 212-612-7880
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks, +1 212-908-9161
Managing Director
or
Committee Chairperson
Daniel Chambers, +1 212-908-0893
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com