Fitch Ratings has assigned an expected 'BBB-(EXP)' rating to Starwood Property Mortgage, LLC's (SPM) proposed Sustainability Term Loan B due in 2027.

Proceeds from the issuance are expected to be used to repay a portion of the firm's outstanding repurchase facilities.

Key Rating Drivers

The expected Sustainability Term Loan B rating is one notch above SPM's Long-Term Issuer Default Rating (IDR), reflecting Fitch's expectation for good recovery prospects given strong collateral coverage of the term loan. The facility will represent a senior secured obligation of SPM, ranking pari passu with the existing term loan B.

Fitch expects the leverage impact from the transaction to be neutral, as proceeds are expected to be used largely to repay other firm debt. Given that SPM is expected to repay secured repurchase facilities with the proceeds of the secured term loan, Fitch does not expect a material impact to the firm's proportion of unsecured funding from this transaction.

SPM's Long-Term IDR is equalized with that of Starwood Property Trust, Inc. (STWD), its parent. STWD's ratings reflect its affiliation with Starwood Capital Group (SCG), which provides access to deal flow and deep industry and collateral expertise, its solid market position within its core segments, diversity of its business model, good asset quality, consistent operating performance, appropriate leverage, a diverse and well-laddered funding profile, and solid liquidity.

Rating constraints include STWD's largely secured funding profile, reliance on wholesale funding sources, and the absence of a track record as a standalone entity through a traditional credit cycle.

RATING SENSITIVITIES

The secured debt rating is sensitive to changes to STWD's Long-Term IDR as well as changes in the firm's funding mix and collateral coverage for the term loan. An increase in secured debt and/or weaker collateral coverage, which weakens recovery prospects on the term loan, could result in the upward notching being eliminated.

Factors that could, individually or collectively, lead to negative rating action/downgrade of STWD's IDR:

A sustained increase in Fitch-calculated leverage, including all non-recourse debt, above 5.0x;

An inability to maintain sufficient liquidity relative to near-term debt maturities, unfunded commitments and margin call potential;

A reduction in business line diversity due to a material shift in strategy;

A material deterioration in credit performance that results in write-offs above longer-term historical levels;

A reduction in core earnings and earnings coverage of the dividend; and/or

A sustained reduction in the proportion of unsecured debt funding below 10%.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A sustained increase in the proportion of unsecured debt approaching 40% of total debt;

The maintenance of leverage at-or-below 3x on a Fitch-calculated basis, including all non-recourse debt;

The maintenance of strong asset quality performance;

Consistent core earnings generation; and/or

The maintenance of a solid liquidity profile.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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