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July 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Accor SA's (Accor; BBB-/Stable) deeply subordinated EUR900m fixed-to-reset rate (DS) notes a final 'BB' rating. Fitch has applied 50% equity credit treatment to this issue. The terms of the final documentation are in line with the information already reviewed when assigning the expected ratings to this instrument.
In addition Fitch assigned Accor SA's CHF150m senior unsecured 1.75% 2022 bond a 'BBB-' rating.
KEY RATING DRIVERS FOR THE DS BOND
The hybrid issue is deeply subordinated and ranks senior only to Accor's share capital, while coupon payments can be deferred at the discretion of the issuer. As a result the 'BB' rating is two notches below Accor's 'BBB-' Long-term Issuer Default Rating (IDR), reflecting the notes' higher loss severity and risk of non-performance relative to senior obligations. This approach is in accordance with the agency's criteria, "Treatment and Notching of Hybrid in Nonfinancial Corporate and REIT Credit Analysis" dated 23 December 2013.
50% Equity Treatment
The DS bonds qualify for 50% equity credit as they meet Fitch's criteria with regard to subordination, remaining effective maturity of more than five years, full discretion to defer coupons for at least five years and limited events of default. Deferrals of coupon payments are cumulative and there are no look-back provisions.
The DS bonds are perpetual notes with no legal maturity date. The bonds are callable on the first call date, and subsequently five years after that date and then on any interest payment date thereafter. Under Fitch's criteria, the effective maturity date is the point in time when replacement intention falls away. The agency will remove the equity credit of the notes for its rating forecasts five years before what Fitch deems as the effective maturity date is reached (ie equity credit will fall away for the above in 2035).
KEY RATING DRIVERS FOR THE CHF BOND
Senior Unsecured Ranking
The CHF senior unsecured bond ranks pari passu with all other senior unsecured debt. The bond benefits from a negative pledge clause as well as other covenants including cross default with other debt. Proceeds from the bond will be for general corporate uses.
KEY RATING DRIVERS
Size and Diversification
Accor's ratings continue to reflect the group's positioning in the economy and mid-scale segments, strong brand awareness, scale and geographical diversification as a leading hotel group in the world and number one in Europe in terms of hotel rooms.
New Property Strategy
Under its new strategy announced in November 2013, Accor has set a value-oriented disciplined hotel ownership strategy, which includes an end to expansion through leases and no further disposals of hotels, unless they are structurally underperforming assets. This should assist in reducing the group's lease-adjusted debt burden in the next three to four years.
Funds from operations (FFO) lease-adjusted gross leverage fell to 4.7x at end-2013 from 5.0x at end-2012, due to reduced lease liabilities. This was broadly in line with Fitch's estimates. We expect a small rise in FFO lease-adjusted gross leverage in 2014 to around 4.9x, due to a combination of various new funding transactions, including the hybrid and the 2021 EUR750m bond in January 2014, partly offset by a reduction in capitalised lease obligations.
New Business Model
The new business model splits the group into two distinct entities with their own targets. The HotelInvest division owns and leases 1,400 hotels and is yield-oriented. Accor's HotelServices division is the hotel operator and brand franchisor within the group and is fee-oriented. Its development strategy is based on management and franchise contracts. From a rating perspective, this new hotel "twin track" strategy should ensure that Accor generates additional free cash flow (FCF) in the medium term, as it moves more towards a fee-based structure and reduces expensive variable-lease payments.
Accor's FCF remains limited as the group continues to own a material proportion of its properties. In addition the group is expanding rapidly, mainly in Asia Pacific and Europe, and is spending around 9%-10% of its revenues in capex. The ratings reflect our expectation of mildly positive FCF margin over the next two years.
Still High Lease Liabilities
While Accor's new property policy includes a firm commitment to not sign any new leases, Accor still has significant rental liabilities totalling over EUR845m at FYE13. However, Accor is reviewing all its leases and particularly its variable leases, which are likely to be restructured and reduced over the next three to four years. Consequently, both lease adjusted leverage and fixed charge cover should slightly improve in the next three years, giving some additional financial flexibility.
Manageable Shareholder Pressure
We believe that shareholder pressure from investors such as PE house Colony Capital will continue. Accor has a publicly stated policy of a dividend pay-out ratio of 50%, but it does not rule out greater cash returns as long as this remains in line with Accor's investment-grade rating objective. Further material cash returns to shareholders and sustained negative FCF could put negative pressure on the ratings.
At FYE13 Accor had EUR1,500m of undrawn committed facilities and EUR1,800m of unrestricted cash (out of a total of EUR2bn). This is comfortable liquidity as Accor only has EUR490m of bond and bank debt maturities until end-2016 and little working capital requirement volatility. On 16 June 2014 Accor announced the signing of its new EUR1.8bn five year syndicated facility, which will further improve its liquidity and debt maturity profile.
Positive: Future developments that could lead, both individually or collectively, to a positive rating action include:
- Group EBIT margin above 15% (FYE13: 9.7%)
- Fitch FFO lease adjusted gross leverage below 4.0x and lease-adjusted net debt /EBITDAR ratio below 3x on a sustained basis
- Lease-adjusted EBITDAR/gross interest plus rents ratio of above 2.5x (FYE13: 1.8x)
Sustainable positive FCF (excluding exceptional costs)
Negative: Future developments that could lead, both individually or collectively, to a negative rating action include:
- Group EBIT margin below 8%
- Fitch FFO lease adjusted gross leverage above 5.0x and lease adjusted net debt/ EBITDAR ratio above 4.0x on a sustained basis
- Lease-adjusted EBITDAR/gross interest plus rents ratio of below 2.0x