An Overview of Credit Tenant Lease Bonds
Credit tenant lease (CTL) bonds have been a niche segment of the private-placement market for the past 20 years. Discover what’s new and what you need to know about this unique financing strategy.
- CTL bonds are lease-backed real estate financings that convert the fixed scheduled rent obligations under a lease — in whole or in part — to debt service payments pursuant to a bond-equivalent debt structure.
- Borrowers/issuers are structured as a single asset or special purpose entity.
- Tenants are typically investment grade with ratings from a nationally recognized rating agency or the NAIC.
- Leases generally have little or no landlord responsibilities (NNN or bondable leases).
- All risks beyond credit (condemnation, casualty gap) are mitigated through third party “special risk insurance.”
- Investors look to the underlying credit or the tenant’s ability to pay rent as the primary underwriting criteria, as opposed to fundamental real estate analysis.
- The NAIC treats these transactions as Schedule D (bond) instead of Schedule B (mortgage), which allows for lower capital reserves for investors.[1]
- Advantages over traditional real estate financing include:
- non-recourse structure
- longer duration (15-25 years)
- lower debt service coverage ratios (1.0x-1.05x)
- higher loan proceeds (90% to 100% LTV)
- limited covenants
- CTL bond pricing is a function of not only the tenant’s sector and credit, but also the existing credit exposure on the buy side as well as the overall transaction structure. Thus, not all NAIC-1s are alike and may not be price comparable.
- Federal, state and local governments and not-for-profit healthcare organizations have been growing more active in this market over the last five years, as have typical issuers, including retailers and other corporations (HQ and DC facilities).
Select Recent CTL Transactions[2]
Issuance | Tenant | Issue Size | Industry | NAIC | MaturityB | Spread Over UST or Coupon (%) |
Dec-15 | GSA - Fish & Wildlife Service | $25.0 | Government Services | NAIC-1 | 25f/10a | In Market |
Dec-15 | Masco Corp. | $19.4 | Industrial | NAIC-2 | 16.4f/10.9a | 5.62% |
Nov-15 | National Lease Fee Portfolio (Class A/B structure) | $90.0 | Ground Leases | NAIC-1 | 33f/25a | 150 bps |
Sep-15 | GSA - VA Facility | $100.0 | Government Services | NAIC-1 | 22f/13.5a | 150 bps |
Aug-15 | Madera County CA | $10.0 | Local Government | NAIC-1 | 25f/15a | 185 bps |
Aug-15 | GSA - FBI Office | $50.0 | Government Services | NAIC-1 | 21.6f/12a | 130 bps |
May-15 | GSA - 14 Properties | $35.2 | Government Services | NAIC-1 | 21f/12a | N/A |
May-15 | FirstEnergy Corp. | $33.0 | Utility Holding Co. | NAIC-3 | 10f/5.4a | 200 bps |
Apr-15 | Verizon Wireless | $591.3 | Telecommunications | NAIC-2 | 20f/12.7a | 170 bps |
Mar-15 | Eli Lilly | $16.7 | Pharmaceutical | NAIC-1 | 10f | N/A |
Mar-15 | CVS | $6.1 | Retail-Drugstores | NAIC-2 | 25f/15a | 4.16% |
Feb-15 | Wal-Mart Stores | $8.0 | Retail-Wholesale | NAIC-1 | 15f/8.5a | 125 bps / ICUR |
Feb-15 | Columbia University | $38.0 | Education | NAIC-1 | 10f | 140 bps |
Feb-15 | Burlington Northern Santa Fe | $180.0 | Transportation | NAIC-2 | 20f/15a | 186 bps / ICUR |
Feb-15 | PNC Bank | $3.3 | Financial Services | NAIC-1 | 25f/13.5a | 175 bps / ICUR |
A Circle Date
B f = final maturity; a = average life
For more information, please contact your relationship manager.
ABOUT THE NAIC
The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the national system of state-based insurance regulation in the U.S. RATING AGENCIESLast Updated 5/4/17 Issue: Rating agencies are for-profit entities whose business is assessing the creditworthiness of issuers of specific fixed income securities for investors. The likelihood the debt of issuers, such as corporations and governments, is repaid in whole or part, is expressed in ratings arranged in a credit quality scale. The NAIC has eliminated its reliance on credit ratings provided by rating agencies for residential and commercial mortgage-backed securities but still continues to rely on rating agencies for other asset classes. The NAIC’s Valuation of Securities Task Force is actively monitoring these other asset classes to determine whether continued reliance is appropriate. Overview: Rating agencies only assess credit risk without consideration of other risks, such as, market risk. Credit rating agencies were founded on the premise they provide informed, expert and neutral assessment of the likelihood of default on or the expected loss of debt (issued by entities, such as corporations, governments, and more recently, securitizers of mortgages and other asset types) to assist investors compensate for the information asymmetries they face in the market. A category of credit rating agencies, called nationally recognized statistical rating organizations (NRSROs) was created by the Securities and Exchange Commission (SEC) in the mid-1970s when it was decided to use their credit ratings to assess the riskiness of securities for regulatory purposes. Until 2006, just five rating agencies (Standard & Poor’s, Moody’s, Fitch, DBRS and AM Best) had been certified as NRSROs by SEC. The U.S. Congress, in order to increase competition, improve transparency and reduce barriers to entry, eliminated the SEC’s existing no action process and passed the Credit Rating Agency Reform Act (CRARA) of 2006. The statute requires that entities that meet defined criteria register with the SEC as a condition of being designated as NRSROs. The Act also gave SEC information-gathering powers, limited oversight powers on the NRSROs and rule making authority. As a result, as of the end of 2013, there were ten rating agencies certified as NRSROs by SEC. Credit rating agencies’ reputation suffered after the great financial crisis revealed serious failures in rating structured securities, especially those related to residential mortgages. The loss of public confidence in rating agencies greatly increased public policy attention to ameliorate any weaknesses in oversight. Credit ratings have been used extensively in financial regulation, including insurance regulation where it is often required by statute. The recent financial crisis exposed the weaknesses of regulatory reliance on NRSROs’ credit ratings. Rating agencies’ rating revisions tend to lag behind market and economic developments as ratings tend to be long-term and meant to be relatively stable over an economic cycle. As a result, ratings typically fail to react fast enough or be sufficiently current to satisfy regulatory needs. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 passed as a policy response to the crisis included provisions for enhanced oversight of ratings agencies. Furthermore, the Dodd-Frank Act called on federal regulatory agencies to eliminate the use of credit ratings and of references to NRSROs in their regulations. Status: In 2004, the NAIC adopted the filing exempt (FE) rule, granting an exemption from filing with the SVO for bonds and preferred stock that have been assigned a current, monitored rating by an NRSRO. Under the FE rule, the NRSRO rating is converted to the equivalent NAIC designation for reporting and reserving purposes. Any NRSRO which has registered with the SEC and been designated an NRSRO may apply to provide credit rating services to the NAIC. The Securities Valuation Office of the NAIC, when directed to do so by the VOS Task Force, will add the NRSRO to the list of Credit Rating Providers (CRP) whose ratings are accepted for the determination of the equivalent NAIC Designation for a reported security under the FE rule. Only CRP ratings that meet NAIC criteria may be translated into NAIC designations while those securities assigned ratings by CRPs that do not meet the same criteria must be filed with the SVO. NAIC, in the process of accepting an NRSRO as a CRP, is not selecting, approving or certifying NRSROs or other rating organizations or distinguishing among them for any public or policy purpose whatsoever. Nor is the NAIC endorsing the credit rating or analytical product of any CRP or rating organization or distinguishing between CRPs or rating organizations for any specific public purpose. The NAIC is a user of credit rating services and a customer of the CRPs. The Rating Agency (E) Working Group (“RAWG”) of the NAIC Financial Condition (E) Committee was formed on February 11, 2009, and charged with conducting a comprehensive evaluation of state insurance regulatory use of the credit ratings of NRSROs. With the financial crisis exposing the unreliability of credit ratings, the RAWG recommended the reduction of the regulatory reliance on NRSRO ratings especially when evaluating new, structured, or alternative asset classes. To move away from ratings for mortgage-backed securities, the NAIC, in 2009, initiated its Structured Securities Project to assist state insurance regulators in establishing a new methodology to determine RBC requirements for the residential (RMBS) and commercial (CMBS) mortgage-backed securities held by insurers. The alternative approach that was adopted by the NAIC involves a new modeling process to enable a more precise assessment of the value of RMBS and CMBS from which NAIC designations are derived. In October 2016, the NAIC Center for Insurance Policy and Research (CIPR) hosted a two-part webinar which reviewed the history and role of rating agencies in insurance |