Fitch Rates NH Hoteles Senior Secured Notes 'B'

Thu Dec 19, 2013 12:26pm EST

(The following statement was released by the rating agency) LONDON, December 19 (Fitch) Fitch Ratings has assigned NH Hoteles, S.A.'s (NHH; B-/Stable) EUR250m senior secured notes a final 'B+' rating with a Recovery Rating of 'RR2'. The rating action follows the review of the final terms of the bond which principally conform to information already received by Fitch. The senior notes are rated two notches above NHH's IDR to reflect above-average recovery prospects. As expected, the proceeds have been combined with a new syndicated term loan and convertible bond issue to repay all debt under a previous senior facilities agreement. NHH's 'B-' IDR reflects high leverage and expected additional free cash outflows over the next two to three years. The rating also acknowledges the initial success NHH has had in implementing several strategic initiatives aimed at strengthening its long-term brand positioning and the market share of the group. 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 EUR140m of assets it plans to sell in 2014. 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 refinancing of the existing term loans with a loan-senior note structure are viewed by Fitch as benefiting the company by extending NHH's maturity profile and unlocking additional cash resources that can be allocated toward property refurbishment and brand improvements. As Fitch does not expect material debt repayment over the next two to three 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 new 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 Contact: Principal Analyst Bryant Bedwell Associate Director +44 20 3530 1581 Supervisory Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Raymond Hill Senior Director +44 20 3530 1079 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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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