Fitch Assigns Lendlease's Proposed Subordinated Hybrid Notes 'BB' Rating

About this update from Lendlease Group

Fitch Ratings has assigned a 'BB' rating to the proposed Australian dollar-denominated non-call (NC) 3 perpetual subordinated hybrid notes to be issued by Lendlease Finance Limited . The proposed notes are guaranteed on a joint and several basis by Lendlease Corporation Limited ( Lendlease , BBB-/Stable), Lendlease Responsible Entity Limited in its capacity as responsible entity of the Lendlease Trust , Lendlease Europe Finance plc , Lend Lease (US) Capital Inc and Lendlease Asia Treasury Pte Ltd. The proposed notes are rated two notches below Lendlease's Issuer Default Rating (IDR), which reflects their subordination within Lendlease's capital structure and the ability of the company to defer coupons. The notes do not qualify for equity credit as their effective maturity is deemed to be the first call date, which is within the next five years, due to the applicable step up exceeding 100bp. Fitch understands that the proceeds from the proposed notes will be used to refinance outstanding debt, while providing additional financial flexibility as the company continues to implement its strategy reset. Key Rating Drivers No Equity Credit Applied: Fitch has not applied equity credit to Lendlease's proposed hybrid notes as the effective maturity of the notes under our Corporate Hybrids Treatment and Notching Criteria. This reflects the three-year non-call period, accompanied by a 500bp step up, which exceeds 100bp to be eligible for equity credit. Furthermore, we believe that the notes will not form a permanent part of the capital structure based on our discussions with management. We understand the hybrid notes will be used to provide additional financial flexibility as Lendlease delivers the remainder of its strategy reset over the next two to three years. Balance Sheet Improvement Underway: EBITDA net leverage improved to 4.1x by the financial year ended 30 June 2025 (FYE25), reflecting improved earnings and Lendlease's use of net cash proceeds of around AUD2 billion from capital recycling initiatives to manage debt (FYE24: 5.1x). The company should return leverage to around 3.5x by FYE26 as it progresses the sale of a further AUD4 billion in international assets and capital recycling opportunities. There remains short-term risk due to the size of the transactions; however, the company is committed to its strategy reset. We expect Lendlease's financial profile to continue improving over the medium term, as it delivers a more conservative balance sheet under its new strategy, announced in May 2024 . The company is targeting an internal gearing range of 5%-15%, down from 10%-20% previously, with gearing defined as net debt/total tangible assets less cash, which it has committed to delivering by FYE26. We forecast EBITDA net leverage to average around 2.0x over the cycle under the new capital structure, down from around 3.0x prior to the strategy reset. Lower Diversification Mitigated: We believe Lendlease's exit from the international development and construction businesses and renewed focus on Australia will have limited impact on the company's credit profile. The Australian development business benefits from its leading market position, enabling it to secure high-profile mixed-use precinct, civic and social construction projects. This supports revenue visibility in this cyclical business. A long record of delivering strong EBITDA margins and cash generation at its Australian projects has helped the company absorb and adapt to recent provisioning and weaker earnings in its international development and construction businesses. Strategy Change to Reduce Risks: We expect the successful implementation of Lendlease's strategy reset will improve the company's credit profile over the medium term. This is based on a higher contribution of investment EBITDA towards 50%, the renewed focus on Lendlease's core market of Australia and more conservative financial targets. This will improve revenue visibility by generating more recurring earnings, while supporting Lendlease's ability to minimise upfront capital outlays to provide balance-sheet flexibility across the cycle. Gradual Capital Shift: Lendlease has reached agreements to divest its international construction businesses and other non-core assets and operations, announcing AUD2.6 billion of its AUD2.8 billion capital recycling target by FYE25. However, we expect capital reallocation towards the investment business to be gradual as it increases funds under management (FYE25: nearly AUD50 billion), while delivering large-scale development projects and selling down co-investment positions exceeding its 5%-10% target range. We may consider positive rating action when Lendlease reaches its target capital structure and demonstrates sustained commitment to meeting its new targets. Financial Flexibility Mitigates Weaker Coverage: We expect Lendlease's strong financial flexibility and steps to reduce debt and deliver a more conservative capital structure to mitigate weaker coverage metrics. Its high leverage, amid a period of high interest rates globally, saw FY24 recurring EBITDA interest cover fall below 1.5x - the level below we may take negative rating action. However, we expect Lendlease's actions to reduce debt and declining interest rates to return coverage to a level commensurate with the rating by FYE27. Joint Venture Structures Bring Complexity: Lendlease uses joint ventures (JVs) to reduce risk on its balance sheet from large development projects. Lendlease and its partners provide equity contributions, with project financing at the JV level on a non-recourse basis. Lendlease also has the ability to sell down its stake and monitor project performance closely. However, there is a risk that it may provide additional support for underperforming projects, especially for high-profile projects. Peer Analysis Lendlease's rating reflects its scale and strong domestic market position, which supports its ability to manage the timing mismatch between investment outflows and cash receipts on its large-scale, multi-year development and construction projects. Its investments business also generates recurring cash flow, supporting balance-sheet strength over the cycle. However, the scale and timing of Lendlease's development pipeline and capital-recycling measures can lead to short-term fluctuations in EBITDA net leverage as it moves through various production phases and cycles. In contrast, Australia -based peer Downer EDI Limited (BBB/Stable) has lower exposure to cyclical cash flow, with a focus on less capital intensive, recurring maintenance-style projects. This allows the company to sustain a more stable and conservative balance sheet and stronger interest coverage over the cycle, offsetting Lendlease's stronger business profile. However, we expect the successful delivery of Lendlease's updated strategy to improve its credit profile in line with Downer's, as the strategy should result in a similar financial structure and lower cyclical cash flow. Mirvac Limited (A-/Stable) is an Australia -based REIT exposed to residential development, with its rating benefiting from a strong investment-property portfolio across office, industrial and retail. The development exposure weighs on Mirvac's rating, given the long cash-conversion cycle between outflows to acquire land for construction and inflows only on settlement. The higher EBITDA contribution from Mirvac's investment portfolio and lower target-capital allocation to development (below 30% of invested capital) explains a rating three notches above that of Lendlease . Lendlease's planned reduction in risk exposure to development could help its profile move closer to that of Mirvac . Key Assumptions Fitch's Key Assumptions Within the Rating Case for the Issuer Funds under management to reach around AUD60 billion by FYE28, including the additional AUD7.3 billion provided by the completion of capital release unit international development projects. Co-investments as a proportion of funds under management to trend towards the mid-point of Lendlease's 5%-10% target range. Development invested capital to trend towards 40% of total invested capital. Australian development return on invested capital to range between 10% and 20% over FY26-FY28. Australian construction EBITDA margin to range between 2.5%-3.5% from FY26-FY28. Cash flow from capital release units included in the forecast and actual results, but ongoing operations prior to sale are excluded from EBITDA forecasts. These include AUD2.7 billion in cash proceeds from asset sales from FY26 and AUD700 million in capital contribution to complete international development projects across FY25-FY27. Dividend payout ratio at the midpoint of 30%-50% of net profit after tax. Capital returns to equity holders of AUD500 million beginning in FY27; any additional buybacks based on Lendlease reaching the midpoint of its 5%-15% company-defined gearing target. Cash outflows for provisions within the non-core segment and a potential Australian Taxation Office assessment of around AUD900 million to be realised over FY25-FY27. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Recurring EBITDA coverage falling to below 1.5x for a sustained period. EBITDA net leverage increasing to above 3.5x for a sustained period. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Successful implementation of the strategic plan and demonstrated record of delivering on new targets, as assessed by: the completion of planned and announced divestments and exit from international construction; recurring EBITDA coverage - defined as the ratio of investments segment EBITDA less gains on sales per Lendlease's financial reports to gross interest expense - improving to above 2.5x for a sustained period (FY25: 1.2x); EBITDA net leverage falling below 2.5x for a sustained period (FY25: 4.1x); and EBITDA margin rising to above 12% for a sustained period (FY25: 10.7%). Liquidity and Debt Structure Lendlease had strong available liquidity of AUD3.0 billion at FYE25, comprising AUD621 million in cash and AUD2.4 billion in undrawn and committed facilities. The company expects a reversal of working capital build up and proceeds from further asset sales to support liquidity and pay down debt in FY26. Lendlease has indicated that it intends to provide returns to shareholders when it has achieved its stated buyback conditions, including its FYE26 gearing target, alongside other criteria. The company has good access to debt capital markets, issuing bond in multiple currencies, and has consistently demonstrated smooth access to various capital markets. Furthermore, its Presold Lendlease Apartment Cash Flows transactions allow Lendlease to reduce settlement risk on residential developments. Issuer Profile Lendlease is a leading Australian real estate and investment group. It focuses on delivering urban projects and investments that generate social, environmental and economic value in Australia , while managing investments for partners globally. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores . (C) 2025 Electronic News Publishing, source ENP Newswire

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