REIT LBOs Would Face CMBS Hurdles

There has been some speculation that real estate investment trusts could become a target of leveraged buyout activity, but it is “unlikely” to occur in the near term, in part because the commercial mortgage-backed securities market is still “constrained,” according to Fitch.

While in 2006 and 2007 period, when LBOs were used to take some REITs private, there was sufficient CMBS debt for transactions to be “essentially predicated on the placement of additional secured debt on the portfolio,” Fitch believes “it is improbable that today’s CMBS market could or would finance a similar volume to a single borrower.”

Fitch also cited the “the traditional covenants in unsecured bonds” as among reasons LBOs in the REIT sector are currently unlikely.

“Bondholders are protected by the traditional REIT maintenance covenants that limit total secured debt to less than the 40% of undepreciated assets and total debt to less than 60% of undepreciated assets. As a result, acquirers would be forced to either limit the amount of debt incurred or negotiate with bondholders for a consent payment and subsequent tender of the bonds,” Fitch noted.

Fitch issued its report in response to speculation about possible LBO targets that has arisen in the wake of recent plans for a leveraged buyout of computer company Dell.