Press Release: Standard & Poor's
April 2, 2002
NEW YORK, NY -- Standard & Poor's yesterday affirmed its ratings on Crescent Real Estate Equities Co. (Crescent)
and Crescent Real Estate Equities L.P. and removed them from CreditWatch, where they were placed on Jan. 23, 2002
(see list). The outlook remains negative.
The former CreditWatch placement followed Crescent's announced termination of its agreement to purchase certain
assets of Crescent Operating Inc. (COPI), an unrated, publicly traded company formed by Crescent. As a result of
this termination, it was uncertain if COPI, which is Crescent's largest lessee, would be able to continue as a
going concern. Crescent has received COPI's lease interests in eight of Crescent's resort/hotel properties and
the voting interests in substantially all of Crescent's residential development corporations and related entities.
Crescent will assist and provide funding to COPI for the implementation of a prepackaged bankruptcy of COPI. In
addition, the prepackaged bankruptcy petition provides for the distribution of Crescent's common shares to COPI's
stockholders in an amount that will be determined by reference to the claims, costs, and expenses of COPI's bankruptcy
and related transactions. These costs are not expected to exceed $14 million. Crescent has also agreed to acquire,
for $15.5 million, COPI's tenant interest in AmeriCold and spin it off to Crescent's shareholders.
By controlling certain COPI assets, Crescent now has a more direct ownership structure, reflective of this management
team's currently more focused strategy. Fort Worth, Texas-based Crescent, with book-value assets of just over $4
billion, now has three key business segments: office (72% of unleveraged funds from operations), resort/residential
development (18%), and investment/non-core (10%). Despite weakness in Crescent's core Houston and Dallas office
markets, the company's portfolio currently outperforms these markets in terms of occupancy and rental rate. Softness
in Crescent's high-end Desert Mountain residential development and Sonoma luxury resort spa remains a modest credit
concern.
The company's financial profile generally improved in 2001, with the refinancing of $970 million of debt. However,
coverage measures at year-end were weak, primarily due to COPI-related net asset write-downs. Leverage of 55% book
value, or just under 50% market value, is expected to remain static during 2002, following a proposed $375 million
senior unsecured debt issuance, while the debt tenor will be lengthened. Proceeds from the company's proposed debt
issuance are expected to be used to repay $310 million of unsecured credit facility balances and retire a $55 million
preferred position in a partnership. The company is expected to use the credit facility to retire the $150 million
unsecured debt due to mature in September 2001 and the $64 million of maturing secured debt. The company's retiring
debt is likely to be refinanced at a higher rate; debt service, and fixed-charge coverages are expected to drop
to the 2 times area. In addition, while last fall's dividend cut did result in improved liquidity, it also drove
the company's stock price lower. The company used asset sale proceeds and the liquidity from the dividend cut to
pursue share repurchases instead of direct debt reduction.
OUTLOOK: NEGATIVE
Crescent's financial profile is weak, with low coverage measures and a largely encumbered portfolio that limits
financial flexibility. The company's core office portfolio performance has been fairly stable but is highly concentrated
in markets with current weak fundamentals. Sustained portfolio weakness, coupled with the potential for meaningful
activity on the company's share repurchase program (which has over $400 million remaining), could stress financial
measures further, prompting a one-notch downgrade. Alternatively, a return to stable would be driven by successful
portfolio performance, despite the current market softness, and a demonstrated commitment by management to a more
conservative financial profile with a tempered policy toward share repurchases.
RATINGS AFFIRMED AND REMOVED FROM CREDITWATCH
Issue To From
Crescent Real Estate Equities Co.
Corporate credit rating BB BB/Watch Neg
$200 million 6 3/4%
preferred stock B B/Watch Neg
$1.5 billion mixed shelf prelim B/B+ prelim B/B+/Watch Neg
Crescent Real Estate Equities L.P.
Corporate credit rating BB BB/Watch Neg
$150 million 6 5/8% senior
unsecured notes due 2002 B+ B+/Watch Neg
$250 million 7 1/8% senior
unsecured notes due 2007 B+ B+/Watch Neg
SOURCE: Standard & Poor's