Troubled REIT Office Properties Income Trust had its credit downgraded again after announcing a debt exchange plan that is likely to result in losses for investors.
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S&P Global Ratings downgraded the REIT to CC from CCC after it announced a plan to offer an exchange of notes on debt maturing between 2026 and 2031 with up to $175M in new notes with a 2030 maturity date.
The terms of the deal mean the current lenders will receive new notes below the par value of the current debt.
“We view the proposed transaction as a distressed exchange because the investors would receive less than they were originally promised,” S&P Global Ratings wrote in a note Friday. “If completed, we would treat this transaction as tantamount to a default.”
The write-down borne by investors in the debt exchange, also announced Friday, would vary depending on the loan and when it is converted.
At the upper end, an investor with convertible notes would receive $890 for each $1K invested. The lowest return, for notes with 2031 expirations, would see investors get $563 per $1K of the note’s value. Investors would also be eligible to receive accrued but unpaid interest on the debt.
The debt exchange, set for March 10, will replace notes with maturity dates in 2026, 2027 and 2031 with new 8% senior priority guaranteed unsecured notes with a 2030 maturity date.
“While this proposed exchange could reduce the company's leverage, if completed, we would view it as a selective default because lenders would likely receive less than they were originally promised,” the S&P Global note said.
The ratings agency also said it was likely to further lower its issuer credit rating for Office Properties Income Trust to Selective Default and its senior unsecured notes rating to Default once the note exchange is completed.
Office Properties Income Trust’s move to shore up its balance sheet follows a warning in October from executives at the company that there was “substantial doubt about its ability to continue as a going concern” because of unsecured senior notes that were slated to come due at the start of this month.
The Massachusetts-based REIT announced another debt exchange in November to address those impending maturity dates. The firm didn’t respond to a request for comment early Monday.
The REIT has been hammered by secular shifts in office use as the sector emerges from the pandemic. Its stock is down more than 75% over the last 12 months, and it's currently trading for under a dollar, down from its $4.06 per share 52-week high.
Its largest tenant is the U.S. government, which occupied 2.9M SF of the REIT's space in October. President Donald Trump’s administration’s efforts to cut government spending and trim its real estate footprint could add another headwind to the stock.
Less than a month after Trump's inauguration, 22 federal leases have already been terminated by the Department of Government Efficiency, the quasi-governmental agency led by billionaire Elon Musk that Trump has tasked with streamlining federal operations.
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