NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has taken several rating actions on iStar Financial Inc.
The following ratings have been affirmed:
--Issuer Default Rating (IDR) at 'B-';
--2012 senior secured tranche A-1 due March 2016 at 'BB-/RR1;
--2012 senior secured tranche A-2 due March 2017 at 'B+/RR2';
--Senior unsecured notes at 'B-/RR4';
--Convertible senior notes at 'B-/RR4';
--Preferred stock at 'CCC-/RR6'.
The Rating Outlook is revised to Positive from Stable.
Fitch has assigned the following ratings:
--October 2012 Secured Credit Facility due 2017 'BB-/RR1'.
KEY RATING DRIVERS
The revision of the Outlook to Positive is based on the company's
demonstrated access to the unsecured debt market, which, combined with
certain secured debt refinancings, have significantly improved SFI's
near-term debt maturity profile. The affirmation of the IDR at 'B-' is
driven by continued weak portfolio metrics, particularly non-performing
loans relative to the size of the total loan portfolio.
Improvements in the company's loan and operating property portfolios
should increase its ability to repay upcoming indebtedness. Stronger
performance should be driven by the mild improvement in commercial real
estate fundamentals, value stabilization, and financing markets (which
increases the likelihood of iStar's borrowers to repay their debt).
WEAK LOAN PORTFOLIO QUALITY
The quality of SFI's loan portfolio has remained roughly the same, with
non-performing loans representing approximately 42% of the company's
gross loan portfolio balance as of Dec. 31, 2012, which is up from 38%
as of Dec. 31, 2011. Illustrative of the company's lending activity
focus on higher-risk, weaker-performing collateral, 46% of its
non-accrual loans were comprised of condominium and land loans as of
Dec. 31, 2012, down from 55% as of Dec. 31, 2011. Further, as of Sept.
30, 2012, 68% of the company's real estate owned (REO) and real estate
held for investment, which represent loans on which the company has
foreclosed, consists of condominium and land collateral.
Despite an improved debt maturity profile, the company's leverage
measured on a GAAP earnings basis (defined as net debt divided by annual
recurring operating EBITDA) of approximately 21x as of Dec. 31, 2012
remains stubbornly high, although it is down from approximately 26x as
of Dec. 31, 2011. Reported EBITDA may understate SFI's cash generation
power, given that the accounting for non-performing loans and REO allows
it to recognize income only upon cash receipt or resolution of the loan.
For example, the company generated over $1.1 billion of asset
monetizations during 2012, mostly from repayments of and principal
collections on loans, driving a $1.1 billion reduction in total debt
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) was only 0.5x for the
year ended Dec. 31, 2012, compared with 0.6x and 1.0x for the years
ended Dec. 31, 2011 and 2010, respectively. Fitch expects this ratio to
strengthen moderately as the company reduces debt from asset sales and
begins to recognize additional GAAP earnings from lease-up of assets
within its operating property segment and sales of residential
The company is moderately constrained by non-compliance with an
unsecured bond fixed charge incurrence covenant, which limits the
company's ability to incur any additional debt to grow its investment
portfolio. SFI's growth will occur via investment of asset sales
proceeds, such as the recently announced sale of LNR Property LLC and
from external capital raising, such as the company's recent $200 million
convertible preferred stock offering.
LOWER QUALITY UNENCUMBERED POOL
SFI's corporate unsecured obligations will need to be serviced by the
company's unencumbered pool, income from assets serving as collateral
for the 2012 secured financings, and external sources of liquidity,
given that both the 2012 senior secured financing and October 2012
secured credit facility debt transactions require that collateral
repayments, sales proceeds and other monetizations be used primarily to
repay debt encumbering collateral pools for each financing. As of Dec.
31, 2012 a majority of the company's unencumbered loans are
However, a portion of its unencumbered assets is liquid and could be
sold to meet corporate obligations over the next two years, which would
mitigate default. The company's recent announcement of the owners' sale
(SFI holds a 24% ownership interest) of LNR Property LLC will generate
$220 million in net proceeds to SFI, indicative of some liquidity of the
company's unencumbered asset base.
While concepts of Fitch's Recovery Rating methodology are considered for
all companies, explicit Recovery Ratings are assigned only to those
companies with an IDR of 'B+' or below. At the lower IDR levels, 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 October 2012 secured credit facility and 2012 senior secured tranche
A-1 ratings of 'BB-/RR1', or a three-notch positive differential from
iStar's 'B-' IDR, are based on Fitch's estimate of outstanding recovery
in the 91%-100% range. Together with 2012 senior secured tranche A-2,
these obligations represent first lien security claims on collateral
pools comprising primarily performing loans and credit tenant lease
assets. The 2012 senior secured tranche A-1 has amortization payment
priority relative to the A-2 tranche.
The 2012 senior secured tranche A-2 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, these
obligations represent first lien security claims on a collateral pool
comprising primarily performing loans and credit tenant lease assets,
but would receive principal amortization only upon the full repayment of
the A-1 tranche.
The senior unsecured notes and senior convertible notes ratings of
'B-/RR4' are in line with iStar's 'B-' IDR, based on Fitch's estimate of
good recovery based on iStar's current capital structure.
While the application of Fitch's recovery criteria indicates a stronger
'RR3' recovery, the company may further encumber a portion of its
unencumbered pool to repay unsecured indebtedness. This action benefits
the IDR at the detriment of recoveries, and Fitch has incorporated the
presence of the unencumbered pool in the 'B-' IDR. This adverse
selection also results in less liquid and less traditional commercial
real estate collateral remaining in the unencumbered pool to support
bondholder recoveries, resulting in Fitch rating recoveries of the
unsecured corporate obligations at 'RR4'.
The Preferred Stock rating of 'CCC-/RR6' or a three-notch negative
differential from iStar's 'B-' IDR, is based on Fitch's estimate of poor
recovery based on iStar's current capital structure. Fitch's recovery
ratings criteria provide flexibility for a two- or three-notch negative
differential between the IDR and instrument rating. A three-notch
negative differential is based on the nature of iStar's perpetual
preferred stock - a deeply subordinated security that has weak terms and
remedies available both before and after a general corporate default
(e.g. no stated maturity, an inability for holders to put the security
back to the company, and iStar has the ability to defer dividends
indefinitely without triggering a corporate default).
The Positive Outlook is based on iStar's ability to access the unsecured
bond market three times in 2012, raising $775 million. These offerings,
combined with a refinancing of certain secured debt financings have
created a stronger liquidity profile and manageable debt maturities
until 2016. In addition, the nascent recovery in commercial real estate
fundamentals and value should enable the company to further monetize
assets within its operating property segment and its unencumbered asset
pool more broadly.
The following may have a positive impact on iStar's ratings and/or
--The ability to incur additional debt under the company's debt
incurrence fixed charge covenant;
--Improvement in the quality of the unencumbered pool, measured by the
sum of non-performing loans, other real estate owned and real estate
held for investment comprising less than 25% of the unencumbered pool;
--Monetization of the company's unencumbered real estate investment
portfolio via asset sales to repay unsecured debt;
--Continued demonstrated access to the common equity or unsecured bond
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
--An increase in the operating property segment as a percentage of the
In addition, Fitch has withdrawn ratings on the below obligations as
they are no longer outstanding:
--Senior secured A-1 tranche due June 2013 at 'BB-/RR1';
--Senior secured A-2 tranche due June 2014 at 'B+/RR2';
--Unsecured revolving credit facility at 'B-/RR4'.
Additional information is available at 'www.fitchratings.com'.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Criteria for Rating U.S. Mortgage REITs and Similar Finance
Companies' (Feb. 26, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' (Dec. 13, 2012);
--'Recovery Rating and Notching Criteria for REITs' (Nov. 12, 2012);
--'Recovery Ratings for Financial Institutions' (Aug. 15, 2012);
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Recovery Ratings for Financial Institutions
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Criteria for Rating U.S. Mortgage REITs and Similar Finance Companies
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.
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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
Source: Fitch Ratings