O1 Properties Boris mints warned investors about currency risk

Group O1 Properties Boris mints, has warned its future holders of Eurobonds of the risks associated with the devaluation of the ruble. As noted in the prospectus of issue of Eurobonds of the company (has) due to a significant increase in payments in rubles tenants may seek to challenge the terms of contracts. “There is a risk that any of our landlords may decide to challenge our lease agreements denominated in dollars or require changes to the terms of such leases by the fixation of rent rates in rubles or the imposition of restrictions on currency fluctuations,” — believe in O1 Properties.

As a precedent, the group A1 gives an example of litigation between VimpelCom and the company Tizpribor, which the operator rents an office in a business center Hermitage Plaza. In December 2015, “VympelCom” has submitted to arbitration court of Moscow the claim in which demanded to renegotiate the terms of the lease, counting the tax at the rate of from 30 to 42 rubles per dollar. To prove his innocence in “VimpelCom” relied on article 451 of the Civil code, under which material change of circumstances may be grounds for alteration or termination of the prisoner between economic entities of the contract. The court sided with the tenant, but later the appellate court reversed this decision. The litigation lasted until August 2016, when the parties went to the world, while “VympelCom” has made the landlord the rent and other preferences.

In O1 Properties believe that although the court ultimately took the side of “Tizpribor”, but there is no guarantee that future disputes will be resolved in favor of the property owners. In the case of O1 Properties, which has 64% of tenants pay the rent in foreign currency, this can lead to significant financial losses. In addition, as noted in the prospectus for issue of Eurobonds, most of the tenants of the property belonging to O1, it is a large company: the 10 largest customers of the group accounted for 35% of the incoming rent payments. The loss of even one of them could significantly decrease the profit of the group Boris mints, is specified in the prospectus.

In particular, one of the key tenants O1 Properties is EY, 2012 rent space in the business center “Aurora”. The agreement provides for the lease of 30 thousand square meters at the rate of $800 for 1 sq. m per year. As previously mentioned , EY considers the possibility to change the location of its headquarters.

“In the event of another wave of devaluation of the ruble, the company may have to make some concessions to tenants, offer them discounts”, — says Moody’s analyst Ekaterina Lipatova. Moreover, O1 has already used this practice, when including the translated part contracts in rubles after the crisis. “In the event of an economic shock, the market can begin the revision of rents, O1 will also have to make new concessions to customers”, — says the analyst.

However, Lipatov draws attention to the fact that O1 was able to maintain a significant proportion of leases in the currency that is losing over 1.5 years only about 20% of the revenues from this activity. “The ruble exchange rate during this time fell against the dollar by about 40%,” she recalls. The Agency predicts growth margin of the company’s EBITDA as all the expenses O1, while, in rubles.

In the market of office real estate of class “A” still prevalent for leases in dollars, says managing partner of Colliers International Nikolay Kazansky. “However, almost all companies that wanted to change the terms of contracts already made it,” he adds. — The only risk which remains today, lies in the possibility of changing the terms of contracts after the end of his term”.

“The first wave of revision of the terms for the lease were at the end of 2014 — beginning of 2015 years and had largely the character of panic, — says head of Department of office real estate Cushman & Wakefield Michael Mindlin. He said that subsequently, the tenants on the office market “A” class held a new round of negotiations — “in a more relaxed mode. In General, the solution of O1 to enter the market of bonded loans is now very timely, the expert believes. “The real estate market on the bottom and begins to grow, so the company’s securities will enjoy a good demand,” — says Mindlin.

As suggested by Ekaterina Lipatova, the assessment of Eurobonds O1 Properties investors will take into account the General situation in the economy. “Despite some stabilization, risks remain high. In the case of the deterioration of the situation, it will affect only on rental rates, but also on the valuation of real estate owned by the company. The decline in asset prices will lead to a deterioration in the credit profile, this will affect the assessment of the risks of investing in paper O1” — says the analyst.

Earlier, the international agencies Moody’s and Standard &Poor’s assigned a rating of B1 and b+ respectively to the planned issue of Eurobonds, noting that the company shows a more positive financial results than the market average. The Agency pointed out that the company owns a significant portfolio of office properties, however, its business depends heavily on borrowed resources.

The company O1 Properties owns and manages a portfolio of 13 business centres, the cost of which is estimated at $3.9 billion While net debt at 30 June 2016 $2.87 billion (including short-term loan commitments was $1.9 billion) According to the statements of O1 Properties, net rental income for the six months of 2016, totaled $166.9 million, compared to $204,29 million for the same period of 2015. The company said that rental income was affected by discounts that the group provided to tenants under agreements in foreign currency. “We have also fixed exchange rates for customers within a specific corridor,” — said the press service of O1 Properties.

Plans to issue Eurobonds O1 Properties announced to investors in early September, saying that it intends to hold road-show in Moscow, Zurich, Geneva, London, new York and Boston. Organized by Credit Suisse, Goldman Sachs, J. P. Morgan, Raiffeisen Bank International and VTB Capital”. “The company may place from $300 to $500 million depending on demand,” — said the Chairman of the Board of Directors of O1 Properties Dmitry mints. The funds raised O1 plans to use to repay previously borrowed loans.