Fitch Ratings has affirmed CapitalSource Inc.'s
(CapitalSource) senior unsecured and long-term issuer default debt
ratings (IDR) at 'BBB-' and removed the ratings from Rating Watch
Negative. Approximately $555 million of debt securities are covered by
Fitch's action. The Rating Outlook is Stable.
Fitch placed CapitalSource's ratings on Rating Watch Negative in September of 2005, in response to concerns related to CapitalSource's announced intention to convert to a real estate investment trust (REIT) structure for tax purposes on Jan. 1, 2006. The Rating Watch action was driven by Fitch's concern regarding the execution of CapitalSource's REIT conversion, including the impact of paying a quarterly dividend and what, if any, changes would result in the company's business to support the dividend in connection with a higher level of common equity outstanding.
Fitch believes that management has successfully navigated through the legal and organizational changes required to convert to a REIT. Since the announcement in September 2005, the company has completed the following actions to facilitate the conversion to REIT status:
-- Paid a special conversion-related dividend totaling $351 million. This dividend was paid in January 2006 and included a cash payment of $70 million and issuance of 12.3 million shares of common stock with an imputed market value totaling $281 million.
-- Completed corporate legal reorganization that resulted in the creation of a REIT subsidiary, CSE Mortgage, LLC, that will hold the majority of CapitalSource's real estate assets. All earnings generated by the CSE Mortgage will generally not be subject to income taxes, but will be required to be paid out to investors as dividends.
Aside from the assets held in the REIT (at least 75% of which must be real estate-related), CapitalSource's other assets are housed in a taxable REIT subsidiary (TRS). This entity, CapitalSource TRS, Inc., is a tax-paying entity with flexibility to retain earnings at management's discretion. However, under tax rules, no more than 20% of the value of the assets of a REIT may be represented by securities of one or more TRSs which may limit the company's ability to invest in non-REIT qualifying operations.
-- To facilitate compliance with REIT requirements, the company has purchased nearly $6 billion in residential mortgage assets, primarily residential mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae and prime residential whole loans that have been securitized through owner trust securitizations. Fitch views the mortgage assets purchased by CapitalSource as a low-risk approach toward meeting the REIT asset requirements. The purchased assets are considered high quality, low risk assets. Furthermore, CapitalSource has effectively hedged these assets to minimize the impact of interest rate fluctuations.
Fitch gains significant comfort that management, in connection with this announcement, has also affirmed many of the business and financial commitments that were important considerations when rating coverage was established in April of 2005. The most important of these commitments are management's intentions to maintain the current business mix and financial leverage in its Commercial Lending Investment segment in the 4.00 times (x) to 5.00x range. Fitch will also closely monitor the relative risk of mortgage related assets and that leverage targets remain appropriate for changes in asset composition. Additional concerns include the company's relatively limited operating history, weakening of overall financial flexibility due to conversion to REIT status and the timing of entry into the real estate sector.
Fitch believes that CapitalSource's management intends to improve, over time, the company's current debt rating. Key rating factors include the establishment of consistent financial performance within the new REIT construct, continued discipline in balancing growth with appropriate infrastructure support and developing a diversified funding strategy that entails maintaining a higher proportion of unsecured debt and unencumbered assets.
Based in Chevy Chase, Maryland, CapitalSource is a specialized commercial finance company offering asset-based, senior, cash flow and mezzanine financing to small and mid-sized borrowers with annual revenues ranging from $5 million to $500 million through three focused lending businesses: Corporate Finance, Healthcare and Specialty Finance and Structured Finance.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch placed CapitalSource's ratings on Rating Watch Negative in September of 2005, in response to concerns related to CapitalSource's announced intention to convert to a real estate investment trust (REIT) structure for tax purposes on Jan. 1, 2006. The Rating Watch action was driven by Fitch's concern regarding the execution of CapitalSource's REIT conversion, including the impact of paying a quarterly dividend and what, if any, changes would result in the company's business to support the dividend in connection with a higher level of common equity outstanding.
Fitch believes that management has successfully navigated through the legal and organizational changes required to convert to a REIT. Since the announcement in September 2005, the company has completed the following actions to facilitate the conversion to REIT status:
-- Paid a special conversion-related dividend totaling $351 million. This dividend was paid in January 2006 and included a cash payment of $70 million and issuance of 12.3 million shares of common stock with an imputed market value totaling $281 million.
-- Completed corporate legal reorganization that resulted in the creation of a REIT subsidiary, CSE Mortgage, LLC, that will hold the majority of CapitalSource's real estate assets. All earnings generated by the CSE Mortgage will generally not be subject to income taxes, but will be required to be paid out to investors as dividends.
Aside from the assets held in the REIT (at least 75% of which must be real estate-related), CapitalSource's other assets are housed in a taxable REIT subsidiary (TRS). This entity, CapitalSource TRS, Inc., is a tax-paying entity with flexibility to retain earnings at management's discretion. However, under tax rules, no more than 20% of the value of the assets of a REIT may be represented by securities of one or more TRSs which may limit the company's ability to invest in non-REIT qualifying operations.
-- To facilitate compliance with REIT requirements, the company has purchased nearly $6 billion in residential mortgage assets, primarily residential mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae and prime residential whole loans that have been securitized through owner trust securitizations. Fitch views the mortgage assets purchased by CapitalSource as a low-risk approach toward meeting the REIT asset requirements. The purchased assets are considered high quality, low risk assets. Furthermore, CapitalSource has effectively hedged these assets to minimize the impact of interest rate fluctuations.
Fitch gains significant comfort that management, in connection with this announcement, has also affirmed many of the business and financial commitments that were important considerations when rating coverage was established in April of 2005. The most important of these commitments are management's intentions to maintain the current business mix and financial leverage in its Commercial Lending Investment segment in the 4.00 times (x) to 5.00x range. Fitch will also closely monitor the relative risk of mortgage related assets and that leverage targets remain appropriate for changes in asset composition. Additional concerns include the company's relatively limited operating history, weakening of overall financial flexibility due to conversion to REIT status and the timing of entry into the real estate sector.
Fitch believes that CapitalSource's management intends to improve, over time, the company's current debt rating. Key rating factors include the establishment of consistent financial performance within the new REIT construct, continued discipline in balancing growth with appropriate infrastructure support and developing a diversified funding strategy that entails maintaining a higher proportion of unsecured debt and unencumbered assets.
Based in Chevy Chase, Maryland, CapitalSource is a specialized commercial finance company offering asset-based, senior, cash flow and mezzanine financing to small and mid-sized borrowers with annual revenues ranging from $5 million to $500 million through three focused lending businesses: Corporate Finance, Healthcare and Specialty Finance and Structured Finance.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.