11/04/2011

REITs Press for Cuts in Credit-Line Spreads

Some property owners have been seeking to negotiate lower spreads on their credit facilities to take advantage of declining borrowing costs, but their success rate is mixed.

For example, Glimcher Realty this month persuaded a KeyBank syndicate to cut the spread on a $250 million secured facility by 112 bp, to 237.5 bp over one-month Libor. But a Bank of America syndicate balked at Phillips Edison’s request to shave 100 bp from its spread of about 300 bp on a $289 million secured credit line.

The borrowers, often REITs, contend they should benefit from a drop in bank markups on credit facilities. “Lending spreads have come in dramatically over the past year,” said Steven Marks, managing director and head of the U.S. REITs group at Fitch.

In 2009, spreads on new or renewed credit lines for investment-grade REITs rated by Fitch were roughly 250-325 bp. The typical range in recent months has been 105-160 bp.

When seeking a spread reduction during the term of a credit line, borrowers generally offer something in return. For example, Glimcher, a Columbus, Ohio, mall REIT, agreed to extend the maturity date of its facility by one year, to October 2015.

The lead banks in syndicates are usually willing to go along in order to maintain good relationships with clients that can provide additional business via other loans or underwriting assignments on stock and bond offerings.

But all syndicate members must sign off on the change, and sometimes small or foreign banks object, especially if the facility is fairly new or if they feel there is little additional business to be gained from the borrower. In such cases, the lead bank can move to buy out the recalcitrant syndicate member — if it thinks doing so is worth it.

Phillips Edison, a Cincinnati fund operator that develops shopping centers, recently sought to cut the spread and loosen some covenants on a facility that the BofA syndicate had renewed for another three years only in January. The credit line is backed by 64 properties controlled by the $275 million Phillips Edison Shopping Center Fund 3.

Phillips Edison “came out to market and basically said, ‘Everyone else is repricing — we want it too,’ ” according to one person familiar with the matter. BofA agreed to the changes and moved to lobby the other syndicate members — roughly a half-dozen banks, including some European institutions. But some objected, the person said.

A lender with a German bank that doesn’t lend to Phillips Edison pointed out that European institutions currently have little incentive to agree to lower spreads. The reason: Their cost of capital is rising because of jitters stemming from the European debt crisis. The German lender said his bank might currently have to finance a U.S. loan by borrowing at a spread of 150 bp over Libor, up from perhaps only 5-15 bp a few years ago. Given those higher costs, foreign lenders don’t want to further reduce their return by cutting the borrower’s spread as well, he said.

Furthermore, foreign banks usually have less chance to win ancillary underwriting business from borrowers.

Glimcher’s modification of its credit facility was the second this year. The REIT said that under the latest changes, “the facility’s borrowing availability limits and certain financial covenants were adjusted to levels more consistent with current market terms.” Glimcher also has the option to increase the facility’s size to $400 million by pledging additional collateral.

In addition to KeyBank, which is administrative agent, the other syndicate members are BofA, Goldman Sachs, Huntington National, PNC Bank, Wells Fargo and U.S. Bank.

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