STARWOOD PROPERTY TRUST, INC.
Fitch Ratings has assigned an expected rating of 'BB+(EXP)' to
Proceeds from the proposed issuance are expected to be used for general corporate purposes, including to pay down borrowings under secured repurchase facilities.
Key Rating Drivers
SENIOR DEBT
The expected rating on the new senior unsecured notes is equalized with the ratings assigned to Starwood's existing senior unsecured debt as the new notes will rank equally in the capital structure. The unsecured debt rating is equalized with the Long-Term Issuer Default Rating (IDR), reflecting the availability of unencumbered assets and average recovery prospects for creditors in a stressed scenario.
This transaction is expected to be neutral to Starwood's leverage, given that proceeds are expected to be used to repay existing borrowings. Starwood's leverage, calculated by Fitch as gross debt-to-tangible equity including off-balance sheet, non-recourse funding comprised of CLO liabilities, CRE A-Note sales and securitizations, and residential lending securitizations, adding back accumulated depreciation on real estate to tangible equity, was 3.6x at
Fitch believes it is appropriate to add accumulated depreciation on the real estate portfolio back to tangible equity, as the firm has a strong track record of recognizing the gross book value of the portfolio at exit. While Starwood's baseline leverage is higher than rated peers, Fitch notes that leverage would be considerably lower, at 2.1x, if all non-recourse borrowings were excluded from the calculation.
Approximately 15.8% of Starwood's debt was unsecured pro forma the issuance at
However, unsecured debt as a proportion of total debt will remain below-average following the issuance. Fitch would view an increase in Starwood's unsecured funding mix favorably as it would enhance its financial flexibility. Still, Starwood's secured funding is diverse and comprised of warehouse lines, repurchase facilities, mortgages and securitizations, with a well-laddered maturity profile.
Starwood's ratings reflect the strength of its affiliation with
Rating constraints include Starwood's primary focus on the CRE market, which exhibits volatility through the credit cycle, a continued challenging environment for certain CRE property types such as office and hotel, a largely secured funding profile and potential for margin calls on secured credit facilities, although the exposure is more modest than peers.
The Stable Outlook for the Long-Term IDR reflects Fitch's view that Starwood will continue to maintain strong asset quality, generate stable and consistent operating cash flows and maintain leverage at a level appropriate for the risk profile of the portfolio. Additionally, Fitch believes the company will continue to opportunistically issue unsecured debt, to enhance its funding flexibility, and appropriately manage its debt maturity profile.
RATING SENSITIVITIES
The expected unsecured debt rating is primarily linked to changes in the Long-Term IDR and would likely move in tandem with it. However, an increase in secured debt and/or a sustained decline in the level of unencumbered assets that weakens recovery prospects on the unsecured debt could result in the unsecured debt ratings being notched down from the IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A sustained increase in the proportion of unsecured approaching 40% of total debt; a reduction in margin call exposure; and the maintenance of leverage at-or-below 2.5x on a Fitch-calculated basis, excluding all non-recourse debt. Positive rating action would also be conditioned on the maintenance of strong asset quality performance, consistent core earnings generation; and a solid liquidity profile.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained increase in Fitch-calculated leverage, excluding all non-recourse debt, above 3.0x and/or a material increase in total leverage; an inability to maintain sufficient liquidity relative to near-term debt maturities, unfunded commitments and margin call potential; a reduction in business line diversity, material deterioration in credit performance, a reduction in core earnings and coverage of the dividend, and/or a sustained reduction in the proportion of unsecured debt funding below 10% could all yield a negative rating action.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Issuer Profile
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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