CVS/Caremark Arranges $745 Million Lease Financing for Sale Leaseback of 166 Drug Stores

Another Financial Portal - December 14, 2009

Based on information received through December 8, 2009, Moody's Investors Service assigns a provisional (P) Baa2 rating to $744.9 million of CVS/Caremark Lease-Backed Pass-Through Certificates, Series 2009-B, to be issued by a trust that will acquire 166 first-priority lien commercial mortgage, credit-tenant lease loans.

The loans will be secured by mostly newly constructed drug stores and related realty that will be triple-net leased to subsidiaries of CVS/Caremark Corporation ("CVS"). Each of the leases will be bondable and guaranteed by CVS, and bankruptcy-remote, special purpose borrowers will own each of the fee or ground-leased properties. The loans mature in January 2032.

Fixed net rent under the leases will be sufficient to pay in full all interest and principal of the loans. The 166 drugstores are located in 34 states.

In rating this transaction, Moody's used its credit-tenant lease ("CTL") financing rating methodology ("CTL approach"). Under Moody's CTL approach, the rating of a transaction's certificates is primarily based on the senior unsecured debt rating (or the corporate family rating) of the tenant, usually an investment grade rated company, leasing the real estate collateral supporting the bonds.

This tenant's credit rating is the key factor in determining the probability of default on the underlying lease. The lease generally is "bondable", which means it is an absolute net lease, yielding fixed rent paid to the trust through a lock-box, sufficient under all circumstances to pay in full all interest and principal of the loan. The leased property should be owned by a bankruptcy-remote, special purpose borrower, which grants a first lien mortgage and assignment of rents to the securitization trust.

The dark value of the collateral, which assumes the property is vacant or "dark", is then examined; the dark value must be sufficient, assuming a bankruptcy of the tenant and rejection of the lease, to support the expected loss consistent with the certificates' rating. Moody's may make adjustments reflecting the possibility of lease affirmations by the tenant and for the landlord's claim for lease rejection damages in bankruptcy. Moody's also may give credit for some amortization of the debt, depending upon the rating of the credit tenant. In addition, Moody's considers the overall structure and legal integrity of the transaction. The certificates' rating may change as the senior unsecured debt rating (or the corporate family rating) of the tenant changes.

(NOTE: Reuters reports that the coupon on the 22 year fully ammortizing notes was 7.507%.) Sphere: Related Content