RPT-Fitch affirms Accor SA at 'BBB-'; stable outlook

Wed Jun 12, 2013 7:58am EDT

June 12 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Accor SA's (Accor) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. Accor SA's Short-term IDR is affirmed at 'F3'. The Outlook on the Long-term IDR is Stable.

The affirmation reflects Accor's resilient trading performance and improved credit metrics in FY12, which are expected to remain steady in FY13 despite the headwinds from the subdued economic environment in Europe. The shift of Accor's business model to an asset-light strategy entails some execution risks due to the difficulty in renegotiating operating leases of its hotels in Europe. In addition the group is pursuing its expansion programme mainly towards franchise and management contracts in emerging markets. Accor's leverage is in line with its current rating with a 3.6x lease-adjusted net debt/EBITDAR ratio at FYE12.

We expect the reduction of operating leases to accelerate towards the end of the group's transformation plan provided that the group maintains the current pace of implementation.

KEY RATING DRIVERS

Size and Diversification: Accor SA's ratings reflect the group's positioning in the economy and midscale segments, brand awareness, scale and geographical diversification as a leading hotel group in the world and number one in Europe in terms of hotel rooms.

Execution Risks of Asset Light Strategy: Accor is moving rapidly from a capital-heavy development model to an "asset-light" strategy similar to its peers in the US such as Marriott ('BBB'/Stable) or Starwood ('BBB'/Stable), expanding mostly via franchise and management contracts in developing markets. Moreover the group's transformation plan implies the restructuring of the existing leases mainly into franchise and management contracts of 600 hotels over the 2013-2016 period. Fitch sees some execution risks associated with this strategy due to the need for the group to find new franchisees and the difficulty to rapidly restructure existing operating leases in a subdued economic environment in Europe.

Weak Profitability to Improve: Fitch expects Accor's trading performance to remain steady in FY13 as downward pressure on revenue per available rooms (RevPAR) in Europe will be offset by exposure to developing markets. Accor's relatively weak EBIT margin at 9.3% is largely driven by the low profitability on hotels operated under owned and leased contracts (4.6% EBIT margin in FY12) which still represent 43% of Accor's room portfolio. We expect better profit margins by FY16 depending on the speed at which Accor implements its transformation strategy.

Low Free Cash Flow (FCF): The group's FCF remains limited because the company has not yet attained an asset-light structure. In addition, the group is expanding rapidly, mainly in Asia Pacific and Europe. Consequently, continuing development capex will reduce the group's FCF generation. However Fitch's expectation is that Accor's credit ratios will be maintained in FY13 driven by asset disposals and despite the still negative free cash flow (FCF).

High Operating Lease Commitments: Accor's adjusted debt mainly comprises capitalised operating leases. Fitch treats such leases as debt-like instruments by capitalising them at a multiple of 8x on fixed leases and 8x on turnover-contingent leases (with a haircut of 25%). This approach differs from the minimum lease payment net present value method that Accor uses to calculate its leverage ratio. The group's asset-light strategy will lead to a reduction in the group's operating leases.

Shareholder Pressure: Fitch believes that shareholder pressure will persist as evidenced by the recent departure of the group's CEO. Accor has a publicly stated policy of a dividend pay-out ratio of 50%, although the company does not rule out greater cash returns as long as this remains compliant with Accor's investment-grade ratings objective. Further material cash returns to shareholders while the company has not achieved yet its transformation plan could put negative pressure on its ratings.

Adequate liquidity: Until Accor generates positive FCF (after exceptional costs), its liquidity is considered adequate with EUR1.5bn of confirmed undrawn syndicated credit lines expiring in 2016 along with cash and cash equivalents of EUR1.9bn as at FYE12.

RATING SENSITIVITIES

Positive: future developments that could lead to a positive rating action include:

- Group's EBIT margin above 15% reflecting a successful transition to an asset-light business model

- Fitch lease-adjusted net debt/EBITDAR ratio below 3x

- Lease-adjusted EBITDAR/net interest plus rents ratio above 2.5x.

- Positive FCF

Negative: future developments that could lead to a negative rating action include:

- Group's EBIT margin below 7%

- Fitch lease-adjusted net debt/EBITDAR ratio above 4x on a sustained basis

- Lease-adjusted EBITDAR/net interest plus rents ratio below 2x.

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