Fitch Affirms iStar Financial at 'B-'; Outlook to Positive
NEW YORK -- March 18, 2013
Fitch Ratings has taken several rating actions on iStar Financial Inc. (NYSE:
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
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 non-performing.
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
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 Outlook:
--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 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 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
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 Credit
Criteria for Rating U.S. Mortgage REITs and Similar Finance Companies
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