RPT-Fitch rates NH Hoteles IDR 'B-'; senior secured notes 'B+(EXP)'

Mon Oct 28, 2013 9:32am EDT

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Oct 28 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned NH Hoteles, S.A. (NHH) a Long-term Issuer Default Rating (IDR) of 'B-' with a Stable Outlook. Fitch has also assigned NHH's planned EUR225m senior secured notes an expected senior secured rating of 'B+(EXP)' with an expected Recovery Rating 'RR2.'

The final ratings are contingent upon the receipt of final documents conforming to information already received by Fitch.

The 'B-' IDR reflects NHH's high initial leverage and additional free cash outflows expected in the near term, as well as a strengthened operational profile. The rating has factored in its initial success in implementing several strategic initiatives aimed at strengthening its long-term brand positioning and the market share of the group. It also reflects Fitch's expectation that the company will be able to successfully refinance its capital structure.

As the group embarks on a multi-year shift toward an asset-light operating model, Fitch views the company's ability to continue divesting at attractive prices as essential to NHH's turnaround. Proceeds will help stabilise liquidity and allow for adequate capital expenditure in the remaining hotel portfolio. This should, in turn, help to justify average daily rate increases and margin improvement.

KEY RATING DRIVERS

Pricing Power Improvement

In recent years, capital expenditure has been scaled back to preserve liquidity. This has resulted in considerable under-investment in NHH's hotel portfolio, which has negatively impacted the company's ability to justify price increases.

Annual capital expenditure has been, on average, at around 54% of depreciation over the past three years. As proceeds from asset sales are reinvested in remaining owned properties, NHH's product offering should allow for steady price increases.

Further Transition to Asset-Light

Management is focused on shifting the overall portfolio toward a "managed" format rather than the "owned" structure currently in place. NHH opened four new hotels in 2012 under the management structure. Furthermore, the company executed several sale and manage-back transactions in recent quarters to further facilitate this transition and have identified additional opportunities for sale in the near term.

On-going Execution Risk

As part of the expected operational improvements, NHH is restructuring or cancelling leases (54% of rooms) and management contracts (21% of rooms) which have become unprofitable due to a combination of increased costs and/or low occupancy rates. While execution risk remains high, the weak performance in recent periods provides NHH with negotiating leverage as hotel owners do not have many branded hotel alternatives to replace the incumbents. As such, renegotiating terms is viewed to be a more affordable option than pursuing litigation.

Improved Financial Flexibility

Asset sales and operational restructuring are the primary drivers of the company's expected turnaround in FY13 and FY14. The proposed refinancing of the existing term loans with a loan-senior note structure would serve to extend NHH's maturity profile and unlock additional cash resources that could be allocated toward property refurbishment and brand improvements. As Fitch does not expect material debt repayment over the next several years, NHH's credit metrics are likely to be a constraining factor on the ratings. NHH's expected lease-adjusted net leverage of around 7.9x at FYE13 compares poorly with other higher-rated hotel and leisure peers such as Accor (BBB-/Stable) and Whitbread (BBB/Stable).

Strong Expected Recoveries

The majority of NHH's properties are in or around major European and Latin American cities. As a result, the portfolio's valuation has proven resilient and become a primary source of liquidity in recent years. NHH's 'RR2' reflects Fitch's expectations that the valuation of the company - and resulting recovery for its creditors - will be maximised in a liquidation, rather than in a restructuring, due to the significant value of the company's owned real estate portfolio. The expected distribution of recovery proceeds should provide above-average recovery for potential senior secured creditors due to significant real estate collateral coverage relative to the drawn debt under the expected capital structure.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

-Lease adjusted net debt/ EBITDAR below 6.5x, EBITDAR/ gross interest + rent above 1.5x (FY14 projection: 1.2x), EBITDA margin (excluding one-time gains) sustained at or above 10% (FY14 projection: 9.1%), as well as a demonstrated path to sustained positive FCF generation

Negative: Future developments that could lead to negative rating action include:

-Continued free cash outflows resulting in strained liquidity, lease-adjusted net leverage above 9.0x, EBITDA margin, excluding capital gain, below 6% and EBITDAR/(rent+interest) below 1.1x

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