Fitch Affirms Starwood’s IDR at ‘BB+’; Outlook Revised to Stable
NEW YORK, NY (March 12, 2010) — Fitch Ratings has affirmed Starwood Hotels & Resorts Worldwide Inc.’s (Starwood) ratings as follows:
–Issuer Default Rating (IDR) at ‘BB+’;
–$1.875 billion senior unsecured credit facility at ‘BB+’;
–$2.7 billion of senior unsecured notes at ‘BB+’.
The Rating Outlook was revised to Stable from Negative.
The affirmation and Outlook revision reflect the modestly improving recovery in lodging demand trends, Fitch’s slightly improved macro-economic outlook over the past few months, management’s continued efforts to support its balance sheet, the repositioning of its timeshare business, and the company’s demonstrated willingness and ability to access the capital markets during difficult market conditions.
Fitch has improved its base case industrywide RevPAR outlook in the U.S. to a 1%-3% decline in 2010 from its initial view of a 3%-5% decline, which was indicated in early December. This follows a 17% U.S. RevPAR decline in 2009. Fitch now anticipates that RevPAR will turn consistently positive by mid-year, slightly ahead of its previous outlook, which called for positive RevPAR growth later in the year. Fitch’s base case continues to incorporate a modest recovery with low-single digit RevPAR growth in 2011, amid a slow macro-economic recovery characterized with high unemployment levels through next year. Lodging credit profiles and ratings would be under pressure if the economic trends pointed to a double-dip recession, although that is not in Fitch’s current outlook.
Domestically, Starwood has greatest exposure to the luxury, upper upscale, and urban market segments. RevPAR performance in upper upscale and urban markets has been consistently outperforming the broader hotel market for five months, while the luxury segment has been consistently outperforming for three months. In addition, Starwood has more international exposure than many of its U.S. peers, and hotel demand internationally is stronger than the U.S. with the sharpest pace of recovery in Asia.
As a result, Starwood recently improved its company-specific forward RevPAR outlook more than its competitors. The company recently indicated a 2010 worldwide same-store RevPAR outlook in local currency of flat to +5% for its company operated hotels and -2% to +2% for its branded owned hotels. This reflects a notable improvement from its previous outlook indicated in late October 2009 of a range of flat to -5% on both measures.
Importantly, the recent demand improvement has been partially driven by the business segment. Initial demand stabilization last year was driven by flattening occupancy, as leisure travelers were attracted by lower prices. Recently, more profitable business transient demand has improved. However, the improvement is primarily from close-in bookings and overall pricing remains weak so the demand recovery remains fragile. Further improvement in lodging credit profiles and Fitch’s demand outlook will result when pricing strengthens and booking windows extend. At this point, pricing in Starwood’s core segments of luxury, upper upscale and urban continues to underperform the broader market.
Despite the significant operating pressure last year, Starwood reduced debt by over $1 billion in 2009, resulting in a year-end debt balance of below $3 billion, which was a level of debt reduction that exceeded Fitch’s previous base case projections. The company demonstrated strong capital market access through two unsecured bond issuances and two timeshare receivable note sales. In addition, the company executed on multiple non-core asset sales and received cash through an amended points agreement with American Express. These actions resulted in $1.6 billion of proceeds that were used to repay debt including $1.375 billion of term loans due in 2009-2011, and to complete a tender offer for $300 million of notes due in 2012-2013.
These actions significantly improved its liquidity and maturity profiles, as Starwood has no bond maturities until 2012 and a minimal balance on its $1.875 billion credit facility, which expires in February 2011 and had $1.6 billion available as of Dec. 31, 2009. Although the credit facility is on the cusp of becoming a current liability, Fitch believes an extension of the revolver at reasonable terms is likely given the company’s improvement in lodging fundamentals, balance sheet, liquidity and free cash flow over the last few months.
As of Dec. 31, 2009, Fitch calculates unadjusted leverage (debt/EBITDA) of 3.9 times (x) and slightly higher on an adjusted basis. Although this is slightly high relative to the ‘BB+’ IDR, mitigating factors include the improving fundamentals in a recovering cyclical industry, ample liquidity, and a solid free cash flow profile. Despite the operating pressure in 2009, Starwood generated $210 million of FCF last year as the company repositioned its timeshare business and was able to execute two receivable note sales. Going forward, the FCF profile will be enhanced by a significantly reduced dividend ($35 million in 2010 vs. $165 million in 2009), continued execution on its asset light strategy, and a less capital intensive timeshare business.
The Stable Outlook incorporates Fitch’s expectation that unadjusted comparable leverage will remain relatively flat in 2010. With only $114 million of revolver debt to be paid down, there is likely to be much less debt reduction in 2010 relative to 2009, while EBITDA will still be under pressure. Starwood’s next bond maturity to address would be the 2012 notes, which had $608 million outstanding as of year-end 2009. Fitch anticipates the company will be opportunistic with respect to refinancing decisions, and current ratings incorporate that capital allocation decisions remain focused on balance sheet improvement.
Securitized timeshare receivable debt will be coming back on balance sheet in 2010, which will result in roughly a $445 million increase in liabilities and a $400 million increase in assets. Pretax earnings are expected to increase by $20-$23 million and EBITDA by $40-$45 million, however, there is no change to cash flow and there is no change to the economics of the securitizations. As Fitch has previously noted, ratings are not affected by the accounting change and will issue additional guidance as it relates to adjusted credit metrics going forward.
Starwood’s ratings reflect the application of Fitch’s current criteria, which are available at ‘www.fitchratings.com’ and specifically include the following report:
–Corporate Rating Methodology (Nov. 24, 2009).
Additional information is available at ‘www.fitchratings.com‘
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SOURCE: Fitch Ratings
Fitch Ratings
Michael Paladino, CFA, +1-212-908-9113 (New York)
Bill Warlick, +1-312-368-3141 (Chicago)
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com
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