investment-grade tenant, you’ve got
two options.” Those are obtaining
either a life company loan or bond
financing, with the latter willing to
extend a higher level of leverage based
on the underwriting of the tenancy’s
credit. The CTL market is “the only
form of debt that I’ve seen in the past
two years where you can get what I consider high leverage,” i.e. 85%, he adds.
Orchard says the bond market is
accounting for an increasing portion
of the net lease business GSP is doing,
and the company isn’t alone. Nashua,
NH-based Net Lease Capital Advisors,
along with investment partners, is
working on a $150-million-plus office
deal that will also be financed in the
There is already a real estate loan in
place on the property and the tenant,
who is two years into its 20-year lease
term, has strong credit. But the asset is
troubled because the owner is in bankruptcy, says NLCA managing director
Jim McCartney. So his company is
working with the lender to help it avoid
having to take the property on its books
by tapping the CTL market for refinancing. “The key is the ability to use
credit tenant finance to solve a couple of problems there,” says
Speaking at the end of the summer, McCartney said that in the
prior 60 days, three or four more high-credit deals with CTL
financing proposed as the best solution for the seller had come
across his desk.
W. Kyle Gore, managing director of Timonium, MD-based CGA
Capital Corp., likewise reports a number of CTL financing deals. In
the spring, CVS Caremark did a $478-million non-rated, private
CTL offering. The executive—who
until recently was with RBS, which
he says co-managed the deal—adds
that the rumble in the market is
that the drugstore retailer could
look to do another one before the
year is over.
More recently, Gore was involved
in several other CTL transactions.
One was a $32.5-million financing
for seven Walgreens stores; the
owner opted for the CTL market
after conferring with seven local
banks that were only offering 65%
loan-to-value and requiring partial
or full recourse, he says. Another was
a $122-million financing for an
investment-grade healthcare company’s sale-leaseback.
Gore says he has also been seeing
a relatively high level of inquiries
for CTL financing for deals involving healthcare-related tenants and
universities and GSA build-to-suits.
He notes seeing an uptick in build-to-suit activity in general, noting that if
companies need to go ahead with
mission-critical facilities, they are
likely to take the net-lease financing
route since traditional debt is either
inaccessible or too costly right now.
Meanwhile, perennial interest in the
big drugstore chains continues, and
he’s starting to look anew at the big
home improvement retailers—
namely, Home Depot and Lowe’s—
now that it looks like the housing
market may be hitting bottom.
Of course, CTL financing works
only if there are buyers for the bonds.
Here, too, Gore says he is seeing
increased interest, particularly from
long-term bond investors. He notes
that spreads in the US corporate bond
market have compressed significantly—so much so that trader commentary has been questioning whether
that market is getting too frothy. As an
example, he cites a recent bond issuance that, despite the corporation having the scarlet letter of financial services exposure, priced at spreads
comparable to two years ago and was
significantly oversubscribed, to boot.
GSP’s Orchard notes that of the overall volume of financing, the
majority is still going to life companies, but he adds that the bond
market is capturing its share of business with credit tenants. Just
how big the CTL market is, however, is tough to pin down. Yet
Orchard notes, “it’s not a massive market,” since there is a finite
number of investment-grade tenants that are willing to sign 15- to
30-year leases with all the features of a bondable net lease.
Based on anecdotal evidence, Gore estimates that the CTL market might total $3 billion to $3.5 billion this year and could grow to
With the residential housing market possibly at its bottom,
large home improvement retailers are possible candidates
for CTL transactions.
The large national drugstore retailers continue to be perennial favorites for both equity investors and lenders
in the net lease marketplace. This spring, CVS Caremark did a $478-million non-rated, private CTL offering.