Investing.com -- S&P Global Ratings has downgraded the long-term issuer credit ratings of Germany-based real estate company, Aroundtown S.A. (AT), to ’BBB’ from ’BBB+’. The downgrade comes as a result of slower-than-expected disposal proceeds and a challenging transaction market.

The ratings agency predicts that AT’s debt-to-debt-plus-equity ratio will remain slightly above 50% over the next 12 to 24 months. Additionally, the EBITDA interest coverage is forecasted to stay below 2.4x, which is outside S&P’s expectations for a ’BBB+’ rating.

The vacancy rates for AT’s office assets have been increasing, reaching 12.7% in 2024, up from 11.8% in 2022. This represents 38.0% of AT’s total portfolio value. Despite a solid operational performance from its residential and hotel segment, S&P believes that the weaker growth outlook for the German economy will impact the performance of its commercial portfolio.

S&P Global Ratings has also lowered issue ratings on AT’s subordinated hybrid bonds to ’BB+’ from ’BBB-’. However, the short-term rating at A-2 was affirmed. The stable outlook reflects the expectation that AT will continue to generate stable income from its existing assets.

AT was expected to meet a deleveraging path in 2025, but due to slower disposal proceeds and market constraints, the company is unlikely to achieve this goal. AT has signed about €90 million of asset sales and closed €120 million from its remaining €330 million signed but not closed sales in 2024. However, market volatility and a weakening German economy are expected to hinder AT’s ability to complete about €1.1 billion of previously expected asset sales.

The ratings agency has revised its base case and lowered disposal expectations to about €500 million-€700 million for fiscal year 2025, with no disposals expected in 2026. The company’s leverage remained high due to asset devaluation pressure, ongoing acquisition outflows, vendor loans provision, and capital expenditure spending.

The company’s EBITDA interest coverage ratio is expected to remain below 2.4x, following limited reduction in gross debt, reduced disposal expectations, and a higher interest rate environment. S&P had previously anticipated that its EBITDA interest coverage would improve to about 2.5x by mid-2025.

AT’s operating performance remains solid, but the commercial segment, particularly its office properties, is expected to face challenges amid economic headwinds. The company posted a 2.9% like-for-like increase in its rental income in 2024, mainly driven by residential segment rental growth of about 4.4%.

AT maintains strong liquidity with a high unrestricted cash position on the balance sheet of about €3.6 billion as of Dec. 31, 2024. The company also has about €775 million available under revolving credit facilities that mature beyond 12 months. These resources are expected to cover upcoming debt maturities until the end of 2026.

S&P could downgrade AT if debt to debt plus equity increased toward 60%, EBITDA interest coverage decreased toward 1.8x, or Debt to EBITDA deviated materially from their forecast. On the other hand, an upgrade could occur if debt to debt plus equity improved to well below 50%, EBITDA interest coverage improved above 2.4x, and debt to EBITDA moved toward 13.0x.

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