Starwood Property Trust Downgraded To 'BB-' As Margin Call Risk Increases From The Impact Of COVID-19; Outlook Negative

  • The fallout from COVID-19 has increased the risk that Starwood Property Trust will experience losses and receive margin calls, specifically on its securities and loan portfolio investments.
  • The company ended 2019 with approximately $4.3 billion of borrowings under secured repurchase facilities backed by commercial mortgage-backed securities, residential mortgage-backed securities, and commercial real estate loans.
  • We are lowering our issuer credit rating on Starwood Property Trust to 'BB-' from 'BB', our senior secured rating to 'BB-' from 'BB', and our senior unsecured rating to 'B+' from 'BB-'.
  • The negative outlook reflects the potential that the company's investment performance suffers and that this leads to margin calls amid the current difficult operating conditions.
NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings said today it lowered its issuer credit rating on Starwood Property Trust Inc. to 'BB-' from 'BB'. The outlook is negative. We also lowered our rating on the company's senior secured debt to 'BB-' from 'BB' and senior unsecured debt to 'B+' from 'BB-'.
The downgrade indicates that the fallout from COVID-19 has increased the risk that Starwood will experience losses and receive margin calls on its securities and loan portfolio investments. The company ended 2019 with approximately $4.3 billion of borrowings under secured repurchase facilities backed by commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and commercial real estate loan investments, with $478 million of unrestricted cash on balance sheet. The company also ended the year with $167 million of approved and undrawn capacity on its repurchase agreements. Subsequent to year-end, the company also received a large repayment of a loan and expects to severely reduce new originations in the short term as it looks to boost liquidity. As of March 16, 2020, the company reported $885 million of combined cash and approved but undrawn financing lines.
The negative outlook reflects the potential that Starwood's investment performance will suffer and that this will lead to margin calls amid the current difficult operating conditions. We expect that over the next 12 months the company will operate with leverage of approximately 2.50x-2.75x debt to adjusted total equity.
We could lower the ratings if Starwood increases leverage materially, if declining commercial real estate property valuations and weakening loan performance strain liquidity, or if the company takes large impairments in its investment portfolio.
We could revise the outlook to stable if the company's investment performance stabilizes and the outlook regarding the full impact of COVID-19 is clearer.
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