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Fitch Affirms Accor SA at 'BBB-'; Stable Outlook
June 12, 2014 / 1:35 PM / 3 years ago

Fitch Affirms Accor SA at 'BBB-'; Stable Outlook

(The following statement was released by the rating agency) LONDON, June 12 (Fitch) Fitch Ratings has affirmed international hotel group Accor SA's (Accor) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Short-term IDR has been affirmed at 'F3'. The Outlook on the Long-term IDR is Stable. The affirmation reflects Accor's strong business profile underpinned by brand diversity and quality, competitive positions in the budget and economy hotel segments worldwide. Fitch expects Accor's operational and credit metrics to remain stable in 2014, as European economies begin to improve and Accor is able to increase occupancy levels and marginally improve room prices. Accor's new property strategy should also allow it to reduce lease liabilities and further grow its business via franchise and management contracts. We assume Accor will maintain a financial policy consistent with its goal to maintain investment grade ratings. 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. In purchasing the Moor Park Fund portfolios for EUR722m in 1Q14, Accor acquired hotel assets already operated and leased by the Accor group under various brand names, but is replacing more expensive variable-cost lease liabilities with cheaper debt financing. Following the Moor Park transaction, Accor has a total of around EUR2.4bn of unencumbered branded hotel assets, which underpins the investment grade rating. Stable Leverage Leverage reduced in 2013 to funds from operations (FFO) lease-adjusted gross leverage of 4.7x at end-2013, versus 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 the combination of various new funding transactions, including the 2021 EUR750m bond issued in January 2014 and higher interest expenses, 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. Low FCF Accor's FCF is expected to remain limited as the company 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 annual capex. The rating affirmation reflects our expectation of mildly positive FCF margin over the next few 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 FY13. 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 private equity house Colony Capital will continue. Accor has a publicly stated policy of a dividend pay-out ratio of 50%, but does not rule out greater cash returns as long as this remains in line with its investment-grade rating objective. Further material cash returns to shareholders and sustained negative FCF could put pressure on the ratings. Adequate Liquidity At FYE13 Accor had EUR1,500m of undrawn committed facilities and EUR1,772m of unrestricted cash (out of a total of EUR2.0bn). This is comfortable liquidity as Accor only has EUR490m of bond and bank debt maturities until end-2016 and there is little movement in the group's working capital requirements during the year. RATING SENSITIVITIES Future developments that could lead, both individually or collectively, to a positive rating action include: - Group EBIT margin above 15%. - Fitch FFO lease-adjusted gross leverage below 4.0x and lease-adjusted net debt /EBITDAR ratio below 3.0x on a sustained basis. - Lease-adjusted EBITDAR/gross interest plus rents ratio of above 2.5x. -Sustainable positive FCF (excluding exceptional costs). 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. Contact: Principal Analyst Kalthoum Sammari Assistant Director +33 1 44 29 91 29 Supervisory Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; 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 28 May 2014, 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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