Business & Finance
Business and Finance
Business and Finance
Mon, March 28, 2011
Sun, March 27, 2011
Fri, March 25, 2011 Fitch Upgrades iStar's IDR to 'B-' on Entry Into New Credit Agreement; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Following iStar's entry into a new $2.95 billion senior secured credit agreement, Fitch Ratings has upgraded the Issuer Default Rating (IDR) and certain obligation ratings and assigned new obligation ratings of iStar Financial Inc. (NYSE: SFI). See the full list of upgrades at the end of the release.
In addition, Fitch has assigned the following ratings:
--$1.50 billion senior secured A-1 tranche due June 2013 at 'BB-/RR1';
--$1.45 billion senior secured A-2 tranche due June 2014 at 'B+/RR2'.
The Rating Outlook is Stable.
The upgrade of iStar's IDR is based on the improved liquidity profile of the company, pro forma for the new senior secured credit agreement (the new financing) that extends certain of the company's debt maturities, relieving the overhang of significant secured debt maturities in June 2011.
While the new financing does not reduce the amount of total debt outstanding, the company's debt maturity profile is more manageable over the next two years, with only 42% of debt maturing, down from 71%. Given the mild improvement in commercial real estate fundamentals and value stabilization, the company's loan and real estate owned portfolio performance will likely improve going forward, which should increase the company's ability to cover fixed charges and repay upcoming indebtedness.
The quality of the company's loan portfolio has improved modestly, with non-accrual loans representing 37% of the company's gross loan portfolio balance as of Dec. 31, 2010, which is down from 43% as of Sept. 30, 2010. The majority (63%) of the company's non-accrual loans are comprised of apartment/residential and land loans. Seventy-eight percent of the company's real estate owned or real estate held for investment, which represent loans on which the company has foreclosed, consist of condominium and land collateral, illustrative of the company's lending activities having been focused on higher-risk, weaker-performing collateral.
Non-accrual and watch list loans represent 41% of the company's gross loan portfolio balance as of Dec. 31, 2010, which is down from approximately 54% as of Sept. 30, 2010. This improvement is due primarily to a significant decrease in non-accrual and watch list loans as commercial real estate valuations begin to stabilize and prospects for loan repayments from borrowers improve.
Despite an improved debt maturity profile, the company's leverage measured on a GAAP earnings basis (defined as Dec. 31, 2010 net debt divided by annualized fourth quarter 2010 recurring operating EBITDA before non-cash impairments and provisions) of 21.2 times (x) is the highest leverage level the company has had throughout the financial downturn. Reported EBITDA may understate the company's earnings and cash generation power, given that the accounting for nonperforming loans and real estate owned allows the company to recognize income only upon cash receipt or resolution of the loan.
Fixed charge coverage (defined as recurring operating EBITDA before non-cash impairments, provisions and gains divided by the sum of interest expense and preferred stock dividends) weakened to 1.1x for 2010, compared with 1.4x and 1.7x for 2009 and 2008, respectively. This ratio is expected to deteriorate further as the company's cost of debt increases.
Given that the new financing requires that collateral repayments, sales proceeds and other monetizations be used to repay only debt encumbering the new financing collateral pool, the company's corporate unsecured obligations will need to be serviced by the company's unencumbered pool and interest income from assets serving as collateral for the new financing, absent external capital raises. While the company is compliant with its unencumbered asset coverage of its unsecured debt senior unsecured notes covenant, the liquidity of the company's unencumbered asset pool is uncertain. While a portion of its unencumbered assets is liquid and could be sold to meet corporate obligations, the borrowing base for the new financing is likely of higher quality.
While concepts of Fitch's Recovery Rating methodology are considered for all companies, explicit RRs are assigned only to those companies with an IDR of 'B+' or below. At the lower IDR levels, Fitch believes there is greater probability of default so the impact of potential recovery prospects on issue-specific ratings becomes more meaningful and is more explicitly reflected in the ratings dispersion relative to the IDR.
The A-1 tranche rating of 'BB-/RR1', or a three-notch positive differential from iStar's 'B-' IDR is based on Fitch's estimate of outstanding recovery in the 91%-100% range. Together with the A-2 tranche, this obligation represents a first lien security claim on a collateral pool comprised primarily of performing loans and credit tenant lease assets, and has amortization payment priority relative to the A-2 tranche.
The A-2 tranche rating of 'B+/RR2', or a two-notch positive differential from iStar's 'B-' IDR is based on Fitch's estimate of superior recovery. Together with the A-1 tranche, this obligation represents a first lien security claim on a collateral pool comprised primarily of performing loans and credit tenant lease assets but would receive principal amortization only upon the full repayment of the A-1 tranche.
The unsecured revolving credit facility, senior unsecured notes and convertible senior floating-rate notes ratings of 'B/RR3' or a 1-notch positive differential from iStar's p 'B-' IDR is based on Fitch's estimate of good recovery based on iStar's current capital structure.
The preferred stock rating of 'C/RR6' or a 3-notch negative differential from iStar's 'B-' IDR is based on Fitch's estimate of poor recovery based on iStar's current capital structure.
The Stable Outlook is based on iStar's stronger liquidity profile given minimal debt maturities until the end of 2012. In addition, the nascent recovery in commercial real estate fundamentals and value should enable the company to monetize its unencumbered asset pool.
The following may have a positive impact on the ratings and/or Outlook:
--Continued monetization of the company's real estate investment portfolio;
--Reduction of other real estate owned and real estate held for investment as a percentage of the company's investments;
--Demonstrated access to the common equity or unsecured bond market.
The following may have a negative impact on the ratings and/or Outlook:
--Deterioration in the quality of iStar's loan portfolio, including an increase in non-performing loans and additional provisions for loan losses;
--An increase in other real estate owned and real estate held for investment as a percentage of the company's investments;
--A covenant breach under one of the company's debt agreements.
Fitch has upgraded the following ratings:
--IDR to 'B-' from 'C';
--Unsecured revolving credit facilities to 'B-/RR4' from 'C/RR5';
--Senior unsecured notes upgraded to 'B-/RR4' from 'C/RR5';
--Convertible senior floating-rate notes to 'B-/RR4' from 'C/RR5';
--Preferred stock to 'CC/RR6' from 'C/RR6'.
Fitch has withdrawn the following ratings as these obligations have been repaid in full by iStar:
--First priority credit agreement due June 2012;
--Second priority credit agreement due June 2011 and June 2012;
--10% second lien notes due 2014.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Mortgage REITs and Similar Finance Companies', March 15, 2011;
--'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011;
--'Corporate Rating Methodology', Aug. 13, 2010;
--'Global Financial Institutions Rating Criteria', Aug. 13, 2010;
--'Recovery Ratings for Financial Institutions', Dec. 30, 2009;
--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Mortgage REITs and Similar Finance Companies
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610689 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Recovery Ratings for Financial Institutions
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493330 ]
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006 ]
Global Financial Institutions Rating Criteria
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685 ]
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
