Business Context and Reporting Period
Sunstone Hotel Investors, Inc. filed this Form 8-K on June 26, 2009, to report the entry into a Material Definitive Agreement. The filing details an Amended and Restated Credit Agreement entered into by Sunstone Hotel Partnership, LLC, a wholly owned subsidiary of the Company.
Key Financial Metrics and Debt Structure
- Total Commitments: Reduced from $200 million to $85 million.
- Subfacilities: Includes a $10 million swingline subfacility and a $25 million letter of credit subfacility.
- Outstanding Borrowings: $0 at the time of filing.
- Letters of Credit: $3.5 million secured under the letter of credit subfacility.
- Collateral: Secured by mortgages on five hotels ("Borrowing Base Assets") and related assets.
- Interest Rates: LIBOR plus 3.75% to 4.25% (Eurodollar) or Prime plus 2.75% to 3.25% (Base Rate), subject to leverage and coverage ratios.
- Fees: 0.50% annual fee on unused portions; 0.25% facility extension fee if applicable.
- Maturity: July 11, 2011, with a one-year extension option subject to conditions.
Material Changes Versus Prior Period
The new agreement significantly alters the Company's credit facility compared to the Existing Credit Agreement dated July 17, 2006:
- Capacity Reduction: Total commitments decreased by 57.5% (from $200 million to $85 million).
- Covenant Adjustments:
- Minimum fixed charge coverage covenant reduced from 1.50:1.00 to 1.00:1.00 (with a one-time election to reduce to 0.90:1.00).
- Maximum total leverage covenant (65%) eliminated and replaced with a maximum net debt to EBITDA covenant of 9.50:1.00 (with a one-time election to increase to 10.50:1.00).
- Usage Restrictions: Proceeds cannot be used for the repurchase of common stock.
Guidance, Risks, and Covenants
The agreement imposes strict financial and operational covenants that may limit the Company's flexibility:
- Financial Covenants: Includes minimum tangible net worth, leverage ratios, and coverage ratios. Failure to meet the fixed charge coverage ratio of 1.15:1.00 triggers stricter borrowing base exposure limits (reduced to 45%).
- Borrowing Base Constraints: Maximum facility exposure to borrowing base value is 55% (or 45% under stress conditions). No single asset may exceed 35% of the pool based on adjusted net operating income.
- Operational Restrictions: Limits on incurring liens, changing business nature, mergers, asset sales, and making distributions (except those required for REIT status).
- Events of Default: Includes failure to pay principal or interest, covenant breaches, and bankruptcy events. An Event of Default increases the Applicable Margin by 2.0%.
Investor Verification Checklist
- Verify the current valuation of the five Borrowing Base Assets to ensure compliance with the $50 million minimum value covenant.
- Confirm the Company's current fixed charge coverage ratio and net debt to EBITDA ratio to assess covenant compliance.
- Review the specific list of hotels included in the Borrowing Base Assets and their individual contribution to the pool.
- Monitor the unused portion of the facility to calculate the 0.50% annual fee impact.
- Check for any subsequent filings regarding the extension of the facility or changes in the Borrowing Base Assets.