CBRE’s credit rating downgraded to ‘negative’

The New York Stock Exchange-listed company, whose shares have enjoyed a 45% rally this week, yesterday suffered the downgrade from the rating agency for its main operating subsidiary, CB Richard Ellis Services Inc (CBRE).

‘We took this action to reflect modest weakening in CBRE's financial profile and our concern about potential further deterioration as the result of the mounting cyclical downturn in global commercial real estate (CRE) markets,’ said Standard & Poor's credit analyst Robert Hoban.

The rating downgrade did not stop CBRE’s shares continuing their bounce back from their lowest-ever price of $3.46 last Thursday. Yesterday they closed at $5.05, a day after the US Fed took further measures to stabilise the financial system.

‘CBRE has historically been aggressive in its financial management, especially considering the cyclicality of its business,' said Hoban. 'CBRE has a long history of debt-financed acquisitions, which have greatly increased its scale and market share, but also left it with high levels of debt, low to modest interest coverage, and substantially negative tangible equity.

‘Although CBRE now earns a larger percentage of its revenue from fee-based businesses than historically, profitability and interest coverage remain highly dependent on healthy CRE markets to generate sales and leasing transaction volume and capital appreciation in the investment management business.'

Hoban added: ‘CBRE's liquidity remains adequate for the rating. The highly seasonal nature of CBRE's business means that its liquidity normally improves throughout the year, but we are concerned that weaker-than-expected cash flow in the historically strong fourth quarter could signal an even more challenging 2009.

‘CBRE buttressed its liquidity position with its recent issuance of approximately $200m in stock. We view this additional liquidity as essential given CBRE's contractual debt repayments of $209m in 2009 and $305m in 2010.

‘The negative outlook incorporates our expectation that global CRE markets are clearly in the midst of a cyclical downturn. Given that and management's recent increase in debt, CBRE may be challenged to maintain debt service coverage that is adequate for the rating.’