Fitch Places Associated Estates' 'BBB-' IDR on Neg. Watch on Brookfield Fund Merger Announcement

NEW YORK--()--Fitch Ratings has placed the 'BBB-' Issuer Default Rating (IDR) of Associated Estates Realty Corporation (NYSE: AEC, the company) on Rating Watch Negative following the announcement that the company's Board of Directors approved a definitive merger agreement under which a real estate fund managed by Brookfield Asset Management (NYSE/TSX: BAM; Brookfield; IDR of 'BBB-' with a Stable Outlook) will acquire all outstanding shares of common stock of Associated Estates for $28.75 per share in cash.

The transaction is valued at approximately $2.5 billion including the assumption of debt. Fitch estimates that the implied capitalization rate for AEC is 4.8% based on trailing 12 months net operating income, emblematic of high multifamily valuations in the current market.

A full list of ratings follows at the bottom of this release.

The Brookfield transaction follows AEC's announcement in December 2014 that it engaged a financial advisor to assist its board in conducting a thorough review of AEC's strategy, assets and business plan. It also follows an activist campaign by the hedge fund Land and Buildings, which began in June 2014 and culminated in Land and Buildings' nomination of three individuals to the AEC board in April 2015. AEC and BAM plan to complete the transaction in the second half of 2015 and the transaction is not contingent on receipt of financing by BAM.

KEY RATING DRIVERS

The Negative Watch indicates a heightened probability of a potential downgrade due to uncertainties regarding BAM's strategy for capitalizing AEC. In the event that BAM, via the fund, elects to keep AEC's unsecured borrowings outstanding, a deviation from AEC's historical operating strategy and financial policies that results in greater credit risk could lead Fitch to downgrade AEC's IDR and senior unsecured ratings to the 'BB' rating category. Examples could include higher leverage, an increase in the company's use of secured borrowings or any actions that result in lower unencumbered asset coverage of unsecured debt, subject to the covenant limits.

Should BAM seek to repay these obligations upon closing, Fitch would likely withdraw all of AEC's ratings. Such an outcome is reasonable given BAM typically capitalizes its investees using non-recourse debt, and also given the depth of the secured lending market for multifamily assets, particularly via the government-sponsored enterprises market. Moreover, the covenants currently governing AEC's corporate obligations limit total leverage and by extension, the equity returns that could be earned by BAM's real estate fund.

KEY ASSUMPTIONS

The key assumption driving Fitch's rating case is that BAM via its affiliate will redeem the AEC bonds and repay AEC's other unsecured borrowings upon the closing of the merger.

RATING SENSITIVITIES

Fitch would likely withdraw the IDR and unsecured debt ratings if the unsecured borrowings are repaid upon the closing of the merger.

In the event that BAM via its affiliated fund does not redeem the AEC bonds and repay AEC's other unsecured borrowings upon the closing of the merger, Fitch could downgrade the ratings to the 'BB' rating category.

Fitch has placed the following ratings on Rating Watch Negative:

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

--$350 million unsecured revolving credit facility 'BBB-';

--$150 million senior unsecured term loans 'BBB-';

--$250 million senior unsecured notes 'BBB-'.

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

Applicable Criteria and Related Research:

--'Associated Estates Realty Corporation Ratings Navigator' (Feb. 26, 2015);

--'U.S. Equity REITs and REOCs Ratings Navigator Companion' (Feb. 5, 2015);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);

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

Applicable Criteria and Related Research:

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

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

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Associated Estates Realty Corp. - Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862023

U.S. Equity REITs and REOCs: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861519

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983532

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Contacts

Fitch Ratings
Primary Analyst
Sean Pattap
Senior Director
+1-212-908-0642
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161
or
Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Sean Pattap
Senior Director
+1-212-908-0642
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161
or
Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com