Fitch Ratings has downgraded the Issuer Default Rating and outstanding credit ratings of Sovran Self Storage Inc. and Sovran Acquisition Limited Partnership. The ratings have also been placed on Rating Watch Negative.
The downgrade centers on the fact that the leverage covenants contained in the company’s unsecured debt agreements limit the its liquidity and restrict its financial flexibility. Per a regulatory filing made with the Securities and Exchange Commission on May 6, Sovran noted that these leverage ratio covenants limit total consolidated liabilities to 55 percent of gross asset value. As of March 31, this ratio was 55.4 percent. As of April 30, the company believes it is in compliance with the original covenant provision.
Presuming the company receives a waiver regarding this covenant breach, Fitch is concerned the company will continue to have limited availability to draw its unsecured revolving credit facility. Fitch estimates the company will have the ability to draw an additional $10 million on this $125 million facility before breaching the leverage ratio covenant.
Further, Fitch said Sovran may also violate this covenant in the future if property-level fundamentals continue to weaken. Sovran expects a decline in same-store net operating income of 2 percent to 4 percent for 2009. A decline of NOI within this range would likely result in a breach of the leverage-ratio covenant.
For the covenants to no longer constrain the company's ability to draw on its unsecured credit facility, Fitch believes Sovran would need to de-lever via asset sales or a common equity issuance.