Business Context and Reporting Period
Sunstone Hotel Investors, Inc. filed this Form 8-K on September 5, 2012, to report the entry into a material definitive agreement. The filing details a Second Amendment to the Company's existing Credit Agreement and Pledge Agreement, executed by Sunstone Hotel Partnership, LLC (a wholly owned subsidiary) and Bank of America, N.A., as Administrative Agent.
Key Financial Metrics and Facility Terms
- Facility Size: Revolving credit facility increased to an aggregate principal amount of up to $150 million, including a $50 million sub-facility for letters of credit.
- Expansion Option: The facility may be increased to up to $350 million subject to additional lender commitments.
- Outstanding Borrowings: There are currently no borrowings outstanding under the Credit Agreement.
- Interest Rates: LIBOR plus a margin of 1.75% to 3.50% for Eurodollar Rate Loans; Base Rate plus a margin of 0.75% to 2.50% for Base Rate Loans. Margins depend on the Consolidated Leverage Ratio.
- LIBOR Floor: The amendment eliminates the previous minimum 1% LIBOR floor.
- Default Penalty: Interest rates increase by 2.0% upon the occurrence of an Event of Default.
- Unused Fee: Annual fee of 0.25% to 0.35% on the unused portion of the facility.
- Maturity: November 1, 2015, with an option to extend for one additional year.
Material Changes and Covenants
The primary material change is the restructuring of the credit facility terms and the removal of the LIBOR floor. The agreement imposes the following financial covenants:
- Maximum Consolidated Net Debt to EBITDA: Ranges from 7.50 to 1.0 down to 6.50 to 1.0.
- Minimum Consolidated Adjusted EBITDA to Fixed Charges: Ranges from 1.30 to 1.0 up to 1.50 to 1.0.
- Minimum Consolidated Tangible Net Worth: $937,501,500 plus 75% of the aggregate increase in Shareholders' Equity.
- Recourse Indebtedness Limit: Maximum of 10% of consolidated tangible asset value.
- Secured Indebtedness Limit: Maximum of 50% of consolidated tangible asset value.
Outlook, Risks, and Contingencies
The filing does not provide specific forward-looking guidance on revenue or earnings. However, it notes that lender obligations to make advances are subject to conditions, including that outstanding borrowings do not exceed the Borrowing Base. The agreement contains customary financial covenants, and failure to meet these could result in an Event of Default, triggering a 2.0% interest rate penalty. The Company retains the right to terminate unused portions of the agreement with five business days' notice.
Investor Verification Checklist
- Verify the current Consolidated Leverage Ratio to determine the applicable interest rate margin and unused fee percentage.
- Confirm the current Borrowing Base calculation to assess available liquidity under the $150 million facility.
- Review the full text of the Second Amendment (Exhibit 10.1) for specific definitions of "Consolidated Net Debt," "EBITDA," and "Fixed Charges."
- Monitor compliance with the minimum tangible net worth covenant of $937,501,500 plus equity increases.
- Assess the potential impact of the removed LIBOR floor on future interest expense in a rising rate environment.