TEXT-S&P rates Starwood Hotels & Resorts notes 'BBB'
Dec 5 - Standard & Poor's Ratings Services assigned its 'BBB' issue-level rating to Stamford, Conn.-based Starwood Hotels & Resorts Worldwide Inc.'s proposed $250 million notes due 2023. Starwood plans to use proceeds from the proposed notes and cash balances to tender for the early redemption of $515 million in aggregate of various notes due 2014 through 2019. All other ratings are unchanged, and the rating outlook is stable. Standard & Poor's Ratings Services' corporate credit rating on Starwood reflects our assessment of the company's business risk profile as "satisfactory" and our assessment of the company's financial risk profile as "intermediate," according to our criteria. Our assessment of Starwood's business risk profile as satisfactory is based on its large, high-quality, and geographically diversified hotel portfolio with many well-established brand names, which has positioned it well during the current global lodging recovery. These advantages are partly offset by the following risk factors: demand for Starwood branded hotels is sensitive to economic cycles, and the company is exposed to the EBITDA volatility of its largest owned hotels and to upper upscale and luxury lodging segments. Our assessment of Starwood's financial risk profile as intermediate is based on our expectation that, pro forma for the early redemption of $515 million in aggregate of various notes due 2014 through 2019 and pro forma for hotel sales in 2012, total adjusted debt to EBITDA is likely to be in the low-2x area and funds from operations (FFO) to total adjusted debt is likely to be in the low-30% area through 2013. In addition, we view Starwood's financial policy of sustaining total lease and captive finance adjusted debt to EBITDA in the 2.0x to 2.5x range as representing a good cushion compared with thresholds we believe are in line with a 'BBB' rating. At this point in the lodging growth cycle, we believe these measures are good compared with our 'BBB' rating thresholds for Starwood of adjusted debt to EBITDA below 3x and FFO to adjusted debt in the high-20% to low-30% range. Leverage below 2.5x would represent a good cushion compared to our 3x adjusted debt to EBITDA threshold, which is prudent during periods of revenue per available room (RevPAR) growth, given the cash flow volatility exhibited during the recent downturn by all lodging operators with significant owned hotel positions and the difficulty in predicting inflection points in the lodging cycle. Starwood reported constant dollar worldwide systemwide RevPAR growth of 4.7% in Q3, slightly below the 5% growth achieved in the first half of 2012. However, current dollar RevPAR grew just over 1% in the quarter, negatively affected by foreign currency translation (although we believe Starwood's system benefits from a natural hedge by having its overseas cost base in local currencies). The company cited the following as reasons for recent slowing global growth: Eurozone economic challenges; slowing demand in North America due to high unemployment, election uncertainties, a looming fiscal cliff, and the Jewish holidays; and a China slowdown resulting from the leadership transition and weaker exports. Starwood also mentioned slowing global GDP negatively impacting commodity-reliant economies in Latin America, and severe economic and political problems in Argentina. Starwood stated it believes this represented a temporary pause rather than a slowing global lodging recovery. Still, adjusted EBITDA (not including EBITDA related to Bal Harbour, unconsolidated joint ventures, or the amortization of deferred gains resulting from prior hotel sales) grew 9% in the third quarter and 9% year to date. The rating incorporates the following operating performance expectations: -- We expect U.S. RevPAR to increase 5% to 7% in 2012 and 3% to 6% in 2013, and that the supply of U.S. hotels rooms will increase less than 1% in 2012 and around 1% in 2013. -- We expect moderating RevPAR growth in many international markets where Starwood has a presence through 2013, and we expect that European RevPAR will be flat to down in the low-single digits in 2013. -- Macroeconomic drivers of our U.S. RevPAR growth expectations are GDP and consumer spending increase estimates of about 2% in 2012 and 2013, and S&P 500 operating earnings growth of 4% in 2012 and 7% in 2013. -- Given current good (albeit moderating) demand patterns and increasing occupancy rates across the U.S. lodging industry, we believe Starwood will likely benefit from pricing power in the U.S. well into 2013, absent an economic shock. -- We have assumed that Starwood increases its net rooms in the system by about 3% in 2012 and 2013. -- We have incorporated into the current rating our expectation that Starwood's constant dollar worldwide company operated hotels system wide RevPAR will increase 6% in 2012 (compared with the low end of Starwood's current 6% to 8% outlook range) and in the mid-single digits in 2013. -- As a result of RevPAR growth and room growth, we have factored into our rating that franchise and base management fees (which we expect will represent about 40% of its 2012 EBITDA before corporate costs) will grow around 10% in 2012. We also believe Starwood's owned and leased hotel segment (about 30% of 2012 EBITDA) will grow about 10% in 2012, incentive fees (about 13% of 2012 EBITDA) will increase in the mid-teen percentage area in 2012, and EBITDA at its timeshare business (about 12% of EBITDA) will increase around 5% in 2012. -- Consequently, we expect Starwood's total EBITDA to increase around 10% in 2012 and in the high single digits percentage area in 2013. -- We have not included future hotel sales into our operating assumptions; however, management says it will be an active seller of hotels for the right price and expects the transaction market for upper upscale and luxury hotels in gateway cities to improve over time. Based on likely sources and uses of cash over the next 12 to 18 months, Starwood has an "adequate" liquidity profile, according to our criteria. Relevant elements of its liquidity profile are: -- We expect sources of liquidity to exceed uses by at least 1.2x. -- We project net sources to remain positive, even if EBITDA declines 15%. -- Starwood maintains solid bank relationships and a satisfactory standing in credit markets, in our view. -- We expect Starwood will likely sustain a prudent approach to financial risk management and share repurchases. -- Starwood was in compliance with its maximum leverage covenant of 4.5x as of September 2012, and would remain in compliance in the event of an unexpected 15% decline in EBITDA, in our assessment. Sources of Starwood's liquidity include $651 million of cash at September 2012 and full availability under its $1.75 billion credit facility due 2018. Given high capital spending levels anticipated in 2012, we do not believe Starwood will generate positive discretionary cash flow this year. We have incorporated into the rating that net cash flow from sales of Bal Harbour units will be around $400 million and proceeds from hotel sales will exceed $500 million in 2012. In addition, Starwood completed a $166 million timeshare securitization issuance in October 2012. Also in October 2012, Starwood raised its 2012 annual dividend 150% from 2011, to $245 million, and has repurchased $140 million in common stock year to date (approximately $360 million remained available under the company's share repurchase authorization). Depending upon the results of the tender offer, Starwood's next meaningful maturity would be either its notes due in 2014 or 2015. OUTLOOK Our stable rating outlook reflects our belief that Starwood will continue to pursue its policy of sustaining leverage between 2.0x and 2.5x and that the company will not likely borrow significantly in the aggregate to complete share repurchases this year or next year. This would represent a good cushion compared to our leverage thresholds at the current rating (total adjusted debt to EBITDA under 3x and FFO to total debt ranging from the high-20% to low-30% range), which is prudent during periods of revenue per available room (RevPAR) growth, in our view, given the cash flow volatility exhibited during the recent downturn by all lodging operators with significant owned hotel positions and the difficulty in predicting inflection points in the lodging cycle. A lower rating could result if we begin to believe Starwood will make a higher-than-anticipated level of share repurchases that would result in leverage being sustained higher than our thresholds at the current rating. Higher ratings are unlikely, given the company's leverage target. RELATED CRITERIA AND RESEARCH -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 RATINGS LIST Starwood Hotels & Resorts Worldwide Inc. Corporate credit rating BBB/Stable/-- Rating Assigned Starwood Hotels & Resorts Worldwide Inc. Senior Unsecured Proposed $250 million notes due 2023 BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.