OREANDA-NEWS. Fitch Ratings has affirmed PSP Swiss Property AG's (PSP) senior unsecured rating at 'A-' and its Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. The Short-term IDR has been affirmed at 'F2'.

The affirmation reflects Fitch's expectation of PSP's continued strong financial risk profile, driven by recurring rental income from a high quality, purely Swiss commercial property portfolio. A conservative balance sheet and management approach towards financing its long- term assets provide strong headroom for the current ratings. The Swiss property market remains stable despite having shown some weakness in 2014. PSP's business model is underpinned by a positive yield gap between its property income yields and low CHF funding rates.

KEY RATING DRIVERS

Uncertain Environment
In January the Swiss Central Bank announced its decision to remove its currency cap and further lower its benchmark rate. PSP is a pure Swiss company and does not directly suffer from any strengthening of the Swiss franc. Nonetheless Fitch will monitor any impact a stronger franc may have on its tenants. Uncertainties from the ongoing immigration and tax reforms may also cast a shadow on the overall appeal of the Swiss real estate market.

LTV Through-the-Cycle
Fitch believes PSP has conservatively managed its loan-to-value ratio (LTV; investment properties/net debt) through the cycle and will continue to do so. The LTV decreased to 30% in 2014 from 37% in 2009, largely driven by increased portfolio value. As a result PSP positively compares with players, which used revaluation gains to further leverage their balance sheet. The modest increase of the LTV in 2014 came from an acquisition in Basel and somewhat higher development expenses but does not change our overall positive view.

Strong Debt Serviceability
PSP has a firm track record of beating Fitch's estimates and we expect the company to continue to achieve EBITDA net interest cover around 6.0x and an LTV between 25% and 35% over the medium term. This is well within the rating guidelines, despite shorter lease structures in Switzerland (three to five years versus seven to eight years for offices in the UK).

Property Bubble Emerging
The current low and even negative interest rate environment continues to increase the level of capital flows into prime Swiss commercial property, which is viewed as a safe haven. This has started to stretch fundamentals and Fitch expects yields on PSP's assets to remain low. The five-year Swiss franc swap rate has remained below 1%, making it attractive to investors when funding prime property assets yielding around 4%.

Turning Swiss Rental Market
The Swiss rental market is expected to remain somewhat weak in 2015, with pressure on vacancy rates especially in Zurich and flattish rents. However, the Swiss market should remain reasonably healthy for prime offices. The rental market continues to be supported by a robust Swiss economy still attracting international businesses.

Strong Recurring Rental Income
Cash flow generation has proved defensive through the cycle, driven by mild inflationary increases and rent improvements upon renewals. Vacancy rate increased slightly to 10% in 2014 (8% in 2013) and PSP's management appears more cautious, flagging a growing supply in Zurich. Vacancies should remain slightly above what has been observed over the last few years. PSP does not have any significant tenant arrears and has not experienced any material tenant defaults.

Measured Development Exposure
PSP's outstanding committed development exposure is moderate at CHF171m, although the potential programme is around CHF439m over the medium term. Fitch expects total development capex for 2014 & 2015 to remain below 3% of the investment property portfolio.

Limited Geographic Diversification
The ratings are constrained by the size of the Swiss property market, which is small by European standards. The ratings also incorporate the fairly short-term lease structure in Switzerland (five years with the possibility of extending at the tenant's request for a further five).

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Almost flat rental income driven by a slight increase in vacancy rate and near zero inflation expectation
- No material change in valuation in 2015
- A small decrease in funding rates

RATING SENSITIVITIES

Negative: Future developments that could lead to negative rating action include:
- An increase in rent arrears, tenant defaults, resulting in EBITDA interest cover falling below 2.5x (7x in 2014)
- LTV above 40% (30% in 2014) and net debt to EBITDA above 9.5x (8x in 2014) on a sustained basis
- Material committed development spend rising above 15% of the portfolio (3% in 2014)

Positive: Future developments that could lead to positive rating actions include:
- An upgrade could occur if PSP materially diversified its existing portfolio geographically or by sector. This transformation would have to be supported by financial metrics being maintained, notably LTV below 40% through the cycle.

LIQUIDITY AND DEBT STRUCTURE

PSP has solid liquidity as the company enjoys CHF580m of undrawn credit facilities that should cover its needs over the next 24 months. PSP does not face any debt maturity before 2016 and has only limited committed capex.

The company has firm access to both local Swiss banks and bond markets, as illustrated by its CHF100m 1% bond maturing in 2025 issued in January 2015.