TEXT-S&P affirms iStar rtgs; outlk stable; term loan rated 'BB-'

Wed Oct 3, 2012 9:08am EDT

Oct 03 -

Overview

-- iStar plans to issue a $1.8 billion senior secured term loan to refinance the balance of its 2011 secured credit facility.

-- We are affirming our 'B+' long-term issuer credit rating on iStar and assigning a 'BB-' credit rating to the secured loan.

-- We believe creditors would likely recover the full amount of the loan in the event of a payment default.

-- The outlook on the ratings remains stable.

Rating Action

On Oct. 2, 2012, Standard & Poor's Ratings Services affirmed its 'B+' long-term issuer credit rating on iStar Financial Inc. (iStar). At the same time, we are assigning a 'BB-' credit rating to the company's proposed $1.8 billion senior secured term loan. The outlook remains stable.

Rationale

Our 'BB-' rating on iStar's proposed $1.8 billion, five-year senior secured loan--one notch above its long-term issuer credit rating--reflects our expectation that creditors would receive full repayment in the event of an issuer default.

The loan will be collateralized by $2.25 billion of assets, or 1.25x the $1.8 billion balance. The collateral includes performing and nonperforming loans, net leases, real estate owned, and other assets and will include most of the same assets that now secure the 2011 facility.

The loan will have minimum annual amortization of 1% and will require iStar to make prepayments with all proceeds from sales or paydowns of the underlying collateral until the collateral coverage ratio rises to 1.375x from 1.25x. iStar must use 50% of those proceeds when the coverage ratio is between 1.375x and 1.50x. No amortization beyond the 1% is required once the coverage ratio exceeds 1.50x.

The secured creditors will also have recourse (alongside unsecured creditors) to the firm's unencumbered assets in a hypothetical default scenario. Given this recourse, the amortization, and the collateral, we believe creditors are likely to recover the full amount of the loan.

The loan would alleviate some of iStar's funding pressure. The two loans that are part of the existing 2011 secured credit facility have more significant amortization requirements than the proposed loan and mature in 2013 and 2014. The loan would also unencumber additional assets, since the 2011 facility is now collateralized at greater than 1.25x. Still, our issuer credit rating on iStar continues to reflect the company's high level of nonperforming assets (NPAs), bottom-line losses, and limited ability to originate new loans.

Outlook

The stable outlook reflects our expectation that the company will report moderate losses over the next year while lowering its NPAs and contracting its balance sheet with limited originations.

We could lower the rating if iStar is unable to reduce its NPAs materially over the next year. We could also lower the rating if we believe the company will have any difficulty meeting the amortization schedule on its secured debt or its 2013 unsecured debt maturities. We could raise the rating if the company substantially reduces its NPAs and liquidates its real estate holdings without incurring large losses.

Related Criteria And Research

-- iStar Financial Inc., April 30, 2012

-- Rating Finance Companies, March 18, 2004

Ratings List

Ratings Affirmed

iStar Financial Inc.

Issuer Credit Rating B+/Stable/--

Senior Secured BB-

Senior Unsecured B+

Preferred Stock CCC+

New Rating

iStar Financial Inc.

Senior Secured

$1.8 billion term loan BB-

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