NEW YORK, NY (May 23, 2013) — Fitch Ratings has assigned a ‘BBB-‘ rating to Wyndham’s proposed $1.5 billion unsecured revolving credit facility due 2018. The agreement will replace its existing $1 billion revolving credit facility that was set to expire in 2016.
The new agreement will have a consolidated leverage and interest coverage covenant of 4.0x and 2.5x, respectively, compared to the previous agreement’s leverage covenant of 3.75x and interest coverage covenant of 3.0x. In addition, there is a carveout added to the new agreement that allows for leverage to go to 5.0x for a material acquisition (defined as gross acquisitions greater than $1 billion). All other terms of the agreement remain materially unchanged.
The company will also increase its commercial paper program to $750 million from its previous program of $500 million. The company considers outstanding borrowings under its commercial paper (CP) program to be a reduction of the available capacity of its revolving credit facility.
KEY RATING DRIVERS
The ratings reflect Wyndham’s strong FCF profile, its focus on an asset-light/fee-driven business model, strong market position in all of its businesses, and management’s public commitment to maintaining investment-grade credit metrics.
Rating concerns include its high exposure to the more capital intensive timeshare industry, cyclicality in the lodging and timeshare businesses, material working capital swings, and leverage being managed at the high-end of Fitch’s target level for the given rating and business risks.
Wyndham’s ample liquidity position is supported by $217 million of cash, $1.3 billion of availability (pro forma capacity less CP and LOC as of March 31, 2013) under its corporate revolving credit facility, and $525 million of availability under its two-year vacation ownership conduit facility as of March 31, 2013.
Wyndham has a sizable and well-established consumer financing business related to its timeshare business. Term securitization transactions of timeshare receivables provide an additional source of liquidity and recent transaction terms have been favorable. Market accessibility was better than Fitch’s expectations through the recent recession, although transaction terms were much less favorable than the current financing environment.
The company’s maturity schedule is favorable with no major maturities coming due over the next four years. The company had $202 million in CP outstanding, as of March 31, 2013.
The company generates strong FCF despite a negative drain on working capital from its timeshare contract receivables. Fitch calculates LTM FCF of $696 million as of March 31, 2013.
–Fitch calculates core lease-adjusted leverage of 3.8x as of March 31, 2013, which is currently above Fitch’s 3.25x target at the ‘BBB-‘ rating level. However, the company acknowledged that leverage was temporarily over its stated target (3.0x – 3.3x) on its recent earnings call and that it would return to its target range over the remainder of the year. If the company manages leverage at current levels for a sustained period of time then there could be negative pressure on the rating/Outlook.
–Wyndham’s current FCF profile is very strong at its current rating. Negative rating pressure could result if Fitch’s outlook for development spending and the capital intensity of the company’s businesses were to increase materially, significantly impacting its FCF generation.
–There could be positive ratings momentum if the company reduced its leverage and adopted more conservative financial policies. Fitch does not expect this to occur in the near term, but upward rating momentum could ensue if core lease-adjusted leverage were reduced to around 2.75x while maintaining a solid FCF profile, and management instituted the policy to maintain leverage around that level.
Fitch currently rates Wyndham as follows:
–Issuer Default Rating (IDR) ‘BBB-‘;
–Short-term IDR ‘F3′;
–Commercial paper ‘F3′;
–$1.5 billion senior unsecured credit facility ‘BBB-‘;
–Senior unsecured notes ‘BBB-‘.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps’ (Jan. 7, 2011);
–‘2013 Outlook: Cross-Sector Lodging & Timeshare – The Penthouse View’ (Dec. 18, 2012);
–‘Corporate Rating Methodology’ (Aug. 8, 2012);
–‘Short-Term Ratings Criteria for Non-Financial Corporates’ (Aug. 8, 2012).
Applicable Criteria and Related Research:
Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps
2013 Outlook: Cross-Sector Lodging & Timeshare — The Penthouse View
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates