Business Context and Reporting Period
Company: RLJ Lodging Trust
Filing Type: Form 8-K (Current Report)
Date of Report: December 18, 2019
Event: Entry into a Material Definitive Agreement involving the amendment and restatement of credit facilities and a term loan agreement.
Key Financial Metrics and Debt Structure
This filing details the restructuring of the Company's unsecured debt facilities. As of the Closing Date (December 18, 2019):
- Revolver: $600 million unsecured revolving credit facility. No borrowings were outstanding at closing.
- Tranche A-1 Term Loan: $400 million unsecured term loan. Entire amount outstanding.
- Tranche A-2 Term Loan: $400 million unsecured term loan. Entire amount outstanding.
- Five Year Term Loan: $225 million unsecured term loan (subject to a Seventh Amendment).
- Total Unsecured Debt Outstanding: $1.025 billion ($400m + $400m + $225m).
Interest Rates (Pre-Investment Grade):
- Revolver: LIBOR + 140 to 195 bps or Base Rate + 40 to 95 bps.
- Tranche A-1: LIBOR + 145 to 220 bps or Base Rate + 45 to 120 bps.
- Tranche A-2: LIBOR + 135 to 190 bps or Base Rate + 35 to 90 bps.
Unused Fees: 20 to 25 basis points per annum on unused Revolver portions.
Material Changes Versus Prior Period
The Company entered into a Third Amended and Restated Credit Agreement and a Seventh Amendment to its Term Loan Agreement, resulting in the following changes:
- Revolver Maturity Extension: Extended to May 18, 2024, with a one-year extension option.
- Tranche A-1 Re-evidencing: Existing $400 million loan re-evidenced with a maturity of January 25, 2023.
- Tranche A-2 Maturity Extension: Extended to May 18, 2025.
- Five Year Term Loan: Conforming amendments made to align covenants and terms with the new Credit Agreement.
- Expansion Options: Added options to increase the Revolver to $750 million, increase Term Loans to $600 million each, and incur up to $475 million in additional term loan tranches.
- Letters of Credit: Added capacity for up to $30 million in letters of credit and $40 million in swingline loans.
Guidance, Outlook, Risks, and Covenants
Financial Covenants: The Company must maintain the following ratios:
- Leverage Ratio: Total debt (net of unrestricted cash over $25 million) to EBITDA not to exceed 7.0 to 1.0.
- Fixed Charge Coverage: Adjusted EBITDA to fixed charges not less than 1.5 to 1.0.
- Asset Coverage: Secured plus certain unsecured indebtedness to total asset value not to exceed 45%.
- Unsecured Debt Coverage: Unsecured indebtedness (net of cash over $25 million) to Unencumbered Asset Value not to exceed 60%.
- Interest Coverage: Adjusted net operating income of the Unencumbered Pool to Unsecured Interest Expense not less than 2.0 to 1.0.
Investment Grade Pricing Election: If the Company achieves an investment-grade credit rating, interest margins will decrease significantly (e.g., Revolver LIBOR margin drops to 77.5–155 bps), and unused fees will be replaced by a facility fee of 10–30 bps.
Risks and Contingencies:
- Collateral Requirement: If the Leverage Ratio exceeds 6.50 to 1.0 for two consecutive fiscal quarters, the Company must pledge equity interests in the Operating Partnership and subsidiaries.
- Penalty Interest: If the Leverage Ratio exceeds 6.5 to 1.0 for a four-quarter fiscal period, interest rates increase by 35 basis points for six months.
- Guaranty Release: Subsidiary guarantors may be released from obligations upon achieving an Investment Grade Rating.
Use of Proceeds: Redevelopment/development costs, hotel acquisitions, capital expenditures, dividends, debt repayment, and general working capital.
Investor Verification Checklist
- Verify the current Leverage Ratio to ensure compliance with the 7.0 to 1.0 covenant and the 6.5 to 1.0 threshold for collateral pledges.
- Confirm the status of the "Unencumbered Pool" of assets, as borrowing capacity is tied to 60% of this value.
- Monitor credit rating agency actions to determine eligibility for the "Investment Grade Pricing Election" and associated interest rate reductions.
- Review the specific terms of the $225 million Five Year Term Loan to confirm the impact of the Seventh Amendment on its maturity and covenants.
- Assess the Company's ability to meet the 1.5 to 1.0 Fixed Charge Coverage ratio given current interest expense levels.