Fitch Affirms Starwood's IDR at 'BBB'; Outlook Remains Stable

Fri May 24, 2013 10:48am EDT

(The following statement was released by the rating agency) NEW YORK, May 24 (Fitch) Fitch Ratings has affirmed Starwood Hotels & Resorts Worldwide Inc.'s (Starwood) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook remains Stable. A full list of ratings actions follows at the end of this release. The affirmation primarily reflects positive industry fundamentals, the company's strong market position and brand awareness, its public commitment to manage leverage between 2.0 times (x) and 2.5x over the long-term, and its ongoing transition to an asset-light business model that will reduce cash flow volatility. Concerns reflected in the current rating include the inherent cyclicality in the lodging industry, the company's limited track record of maintaining investment grade metrics through a lodging cycle, and the potential for a large acquisition, increased investment spending, or an increase in shareholder friendly actions. KEY RATING DRIVERS Reduced Debt Balance The company has significantly reduced non-securitized debt levels over the past three years - from $2.9 billion at year-end 2010 to current levels of $1.3 billion. Starwood management has indicated that it will no longer look to reduce debt levels. Fitch estimates Starwood's consolidated lease-adjusted leverage (including consumer finance profits and securitized debt) at 1.8x and its core lease-adjusted leverage (excluding consumer finance profits and securitized debt) at 1.5x (1.7x excluding Bal Harbour EBITDA) as of 1Q'13. Core lease-adjusted leverage is comfortably within Fitch's target of below 2.75x for a 'BBB' IDR. The company maintains ample financial flexibility at current ratings to pursue a debt funded acquisition (the company mentioned in March it is open to acquiring a global, luxury brand), increased investment spending, and/or share repurchases. There could be positive rating momentum if the company continues its asset-light strategy transition, and continues to build its track record of maintaining low leverage through economic cycles and when leveraging opportunities arise. Industry Fundamentals Remain Positive: U.S. RevPAR has increased 6.7% through April year-to-date according to Smith Travel, ahead of Fitch's full-year outlook of 5.5%. The company's 2013 worldwide RevPAR guidance calls for 5% - 7% growth on a same-store company operated basis in constant dollars, which is within Fitch's expectations. U.S. supply growth will likely remain below 1% for all of 2013 and still well below the long term average of 2% in 2014. This provides cushion to downside scenarios and contrasts the situation during the recent recession when supply growth was peaking at more than 3% in 2008 - 2009. Hotel property-level operating performance should continue its solid improvement over the next two years as a result of the favorable supply/demand outlook. Fitch's expects Starwood's revenue (excluding cost reimbursements and Bal Harbour residential revenues) to be roughly flat and EBITDA (excluding Bal Harbour) to be up slightly in 2013. The main assumptions include owned/leased revenue down low- to mid-single digits due to previous asset sales, fee revenue up in the high single digits, and roughly flat vacation ownership revenue. RevPAR growth has been increasingly driven by improvement in the average daily rate (ADR), which drives unit level profits. This will improve Starwood's owned/leased hotel portfolio profitability and drive further increases in incentive fees. Starwood's heavier asset base and greater exposure to higher end segments is a slight business risk as both contribute to greater cash flow volatility. However, Fitch forecasts that in the near term the credit will benefit from the positive operating leverage associated with its owned asset portfolio and concentration in luxury, upper-upscale, and upscale segments in urban locations. The lodging industry is highly cyclical and the ratings incorporate Fitch's macro-economic outlook, which calls for annual U.S. GDP growth of 1.9% and 2.8% in 2013 and 2014, with world economic growth at 2.2% and 2.8% over the same time frame. Starwood is heavily weighted to the corporate sector and Fitch expects continued positive trends relating to corporate profitability and corporate liquidity, providing support to business travel demands. Fitch's stress case forecasts that the company's credit profile has improved to the point that its financial profile can withstand another significant recession (i.e. a double digit RevPAR decline) and maintain an investment grade IDR. Liquidity and Free Cash Flow Outlook Starwood's liquidity profile is solid, with cash of $387 million and revolver availability of $1.75 billion at the end of 1Q'13. The company's maturity profile is manageable, with its next maturity of $300 million due in 2015. In addition, although less certain, future owned hotel asset sales will also provide additional liquidity. The company's goal is to sell $3 billion of hotel assets by 2016. The company increased its dividend by 150% in 2012, which translates into an aggregate payout of roughly $250 million. The company also expects capital expenditures and other investment spending to total $550 million in 2013. Fitch still expects free cash flow (FCF) after dividends to be in the range of $100 million - $200 million in 2013 and 2014. Further, Fitch believes management will increasingly focus capital allocation decisions on growth investments, potential acquisitions and shareholder friendly initiatives, within the context of maintaining its 'BBB' rating. RATING SENSITIVITIES --Starwood's current leverage is more consistent with a 'BBB+' IDR. However, Fitch believes the company needs to demonstrate that it will maintain its strong balance sheet position over the long-term (e.g., through a lodging downturn and/or when leveraging opportunities arise). --The company has ample flexibility at the current rating to pursue debt funded acquisitions or share repurchases as long as it maintain core lease adjusted leverage below 2.75x. --As with all investment grade issuers, a negative rating action could occur if management changes its financial policy. Starwood's public commitment to manage leverage in the 2.0x-2.5x longer-term is comfortably within Fitch's target of 2.75x for a 'BBB' rating. At its current leverage level, Fitch believes the company could retain its current rating during a stressed economic environment that resulted in RevPAR declines of 12%-14% Fitch has affirmed Starwood's ratings as follows: --IDR at 'BBB'; --$1.75 billion senior unsecured credit facility at 'BBB'; --$1.2 billion of senior unsecured notes at 'BBB'. Contact: Primary Analyst Shawn Gannon Associate Director +1-212-908-0223 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Michael Paladino, CFA Senior Director +1-212-908-9113 Committee Chairperson Timothy Greening Managing Director +1-312-368-3205 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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). Applicable Criteria and Related Research: Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps here 2013 Outlook: Cross-Sector Lodging & Timeshare — The Penthouse View here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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