Nordic Credit Rating (NCR) said today that it welcomed the European Public Real Estate Association's (EPRA's) newly defined loan-to-value (LTV) ratio, but stressed it will have no direct impact on NCR's calculation of adjusted net LTV for real estate issuers.
NCR takes a positive view of EPRA's attempts to increase comparability across the European real estate sector. We understand that the association's guidelines are based on a shareholder's perspective and believe that its debt treatment of all hybrid instruments (except for D-shares, which are viewed as equity) is adequate in this context. From a credit perspective, we argue that the relative subordination of hybrid instruments (such as preferred shares and hybrid bonds) in comparison with senior debt is adequately reflected by attributing some equity treatment to such instruments. We do not expect to make any changes to our calculations on the basis of EPRA's guidelines. In our credit metrics for real estate companies, we generally view D-shares as 100% equity while hybrid bonds are given either 0% or 50% equity treatment depending on the permanence of the instrument. Preferred shares are accredited 0–100% equity treatment, with 50% being the most frequent option.
In EPRA's LTV calculation, the association includes a company's proportionate consolidated share of assets and liabilities in equity-accounted investments, such as joint ventures and associated companies. While we believe that EPRA's approach to joint venture and associated company assets and liabilities is essentially sound, we plan to continue assessing the feasibility of including them in our calculation of credit metrics. We expect no direct impact on our current ratings because most NCR-rated issuers have limited exposure to such investments. Where relevant, we have considered a parent company's exposure to debt in joint ventures and associated companies in our financial risk appetite assessment rather than our financial ratio analysis and we take the view that such risk is already reflected in our current issuer ratings.