(The following statement was released by the rating agency)
NEW YORK, February 18 (Fitch) Fitch Ratings has affirmed the
Rating (IDR) for Wyndham Worldwide Corp. (Wyndham) at 'BBB-'.
Fitch has also
assigned a short-term IDR of 'F3' to Wyndham Global Finance PLC
Rating Outlook is Stable. A full list of rating actions follows
at the end of
WGF is a wholly-owned subsidiary of Wyndham Worldwide Corp.
through which the
company issues commercial paper (CP) in Europe. Notes issued by
unconditionally and irrevocably guaranteed by Wyndham.
The ratings reflect Wyndham's strong free cash flow (FCF)
profile, the majority
of which is made up of recurring fee income generated by its
exchange and rental and time share segments. The ratings also
management's public commitment to maintaining investment-grade
Elevated leverage for the 'BBB-' category remains Fitch's
concern, in the context of Wyndham's high exposure to the
cyclical lodging and
timeshare industries and an increase in the company's
contractual and contingent
STRONG FCF GENERATION
Wyndham has consistently generated strong annual FCF since
efficient capital allocation policies in 2008 in connection with
recession. The company generated FCF after dividends of $614
2013, roughly 21.3% of its total core debt balance (unadjusted
securitized debt). Fitch expects FCF/debt will remain above 17%
over the next
one to three years - a moderately lower rate primarily due to
Fitch's expectation is that management will continue to focus on
alternatives in the timeshare segment (e.g. Wyndham Asset
and management fee revenue) in addition to maintaining
asset-light, fee-driven lodging and vacation exchange and
Wyndham generates approximately 60% of its total revenues (and a
percentage of its profits) from recurring fees associated with
franchise and vacation rentals and exchange businesses, as well
fees from timeshare communities. Vacation interval shares (e.g.
up the majority of the balance.
The ratings reflect the company's strategic purchase and ongoing
two hotel properties that are part of mixed-use developments
lodging and timeshare. Fitch expects the franchising of its
hotel brands to
remain Wyndham's primary focus with hotel ownership representing
a very small
component of its overall strategy.
POSITIVE LODGING FUNDAMENTALS
Wyndham's lodging business primarily includes franchising
midscale and economy
hotel brands in the U.S. (roughly 80% of its room system at Dec.
31, 2013). U.S.
demand trends remain strong, although growth is moderating as
lodging cycle matures. Fitch expects 2014 to be another good
year for the U.S.
lodging industry, with RevPAR growth of 5.5%, above the 3%
average. U.S. RevPAR grew 5.4%, 6.8%, and 8.2% in 2013, 2012,
respectively, according to STR Global.
Fitch expects Wyndham's RevPAR to grow slightly below the
industry average rate
at this stage of the lodging cycle, as hotels in the mid- to
generally have less pricing power than ones in the upper-scale
Strong occupancy rates and low supply growth are supporting
power within the U.S. lodging industry, in general. Supply
growth has passed its
trough, averaging 0.5% and 0.7% in 2012 and 2013, respectively.
U.S. hotel supply to accelerate to 1.1% during 2014, but remain
below the 2% annual industry average since 1988.
DIFFERENTIATED SEGMENT: EXCHANGE & RENTALS
Fitch views Wyndham's vacation exchange and rentals segment as a
positive that distinguishes it from the traditional businesses
high-profile lodging companies. Vacation exchange and rentals
make up roughly
30% of the company's revenue and EBITDA and is predominantly
the exception of a small portion of owned/leased properties on
the rentals side.
This segment provides stability to the business profile as it
had less severe
declines during the past recession (8.5%) compared to both the
timeshare segments. In addition, it has a fairly flexible cost
allowing for easier cost reductions during a downturn.
Scale represents a significant barrier to entry in the vacation
industry given the large number of resorts needed to make it an
exchange network. The industry structure is essentially a
Wyndham's vacation exchange business, RCI, and Interval Leisure
Group, Inc. RCI
is the larger of the two, with over 4,000 vacation ownership
resorts in its
network compared to Interval's roughly 2,800 resorts.
Exposure to Europe and its small ownership position in several
elevate the near-term business risk in Wyndham's rentals
business, in Fitch's
view. However, the company is progressing in its efforts to
apply the dynamic
revenue management concepts from its lodging and exchange
businesses to improve
the pricing and margins for Wyndham and its customers over the
Fitch views vacation rentals as an attractive fee-for-service
complements Wyndham's other hospitality businesses from a
perspective. The company has a strong competitive position,
which should allow
it to capitalize on consolidation opportunities in the
industry. Fitch expects smaller 'bolt-on' acquisitions to be
while acknowledging that consolidation may introduce some M&A
HIGH EXPOSURE TO TIMESHARE
Fitch generally views the timeshare business less favorably than
business due to greater earnings volatility and capital
estimates that roughly half of Wyndham's revenues and slightly
less than half of
its EBITDA comes from timeshare operations (including a small
timeshare-related fee revenue).
Excess inventory build leading up to the global financial crisis
development spending low for the industry at this point in the
expects higher development spending associated with inventory
lead to increased cash flow volatility for timeshare companies
during the next
three to five years.
Wyndham has modified its timeshare business model in an effort
to reduce cash
flow volatility. Examples include emphasizing recurring
(evidenced by its acquisition of Shell Vacations, which mostly
already sold inventory), as well as the company's transition of
a portion of its
business to the WAAM model. Wyndham created the WAAM model to
capital efficiency of its timeshare business. The company has
several iterations of WAAM based on changing market conditions
sets in the industry.
In Fitch's view, the WAAM model is more efficient with respect
allocation, but the level of risk taken by Wyndham has increased
as the WAAM
model has evolved. WAAM began as an opportunistic extension of
timeshare sales and marketing platform whereby the company
revenues for selling timeshare inventory owned and developed by
The most recent iteration of WAAM has Wyndham selling owned land
and work in
progress (e.g. existing inventory) to a third party that will
finance and build
the timeshare units under the company's supervision. Wyndham
repurchase the inventory based on a prescribed takedown
Each WAAM deal has been somewhat idiosyncratic and future deal
change. Wyndham will also continue to develop timeshare resorts
on its balance
sheet. Longer term, Wyndham's goal is for approximately 50% of
its run rate
development spending to be WAAM deals.
Fitch expects the company will continue to seek timeshare
opportunities under its asset-light WAAM business model, in
addition to modest
timeshare inventory spending of roughly $150 million annually.
Longer term, the
ratings incorporate Fitch's assumption that inventory spending
will ramp up
modestly, resulting in a continued solid FCF profile.
INCREASED OFF-BALANCE-SHEET LIABILITIES
The ratings contemplate Wyndham's off-balance-sheet liabilities
contractual and contingent obligations, which have increased
during the past
several years. Fitch incorporates these items into the ratings
Wyndham's liquidity position and the potential impact to
under various liability funding scenarios.
Inventory purchase commitments under its WAAM business model
Wyndham's off-balance-sheet contractual obligations. Fitch
financing elements associated with these transactions, but does
them akin to debt.
As with all of its financial obligations, Fitch is monitoring
total and maximum annual funding requirements related to its
purchase commitments, emphasizing the impact to leverage under
and industry conditions. Wyndham has adequate flexibility to
discretionary capital expenditures (i.e. share repurchases) to
pay down debt and
reduce leverage in an economic downturn.
The company's contingent obligations have increased in recent
years due, in
part, to performance guarantees associated with recent
with FelCor (FCH) and Hospitality Properties Trust (HPT).
Fitch recognizes that the company may periodically need to enter
agreements that contain performance guarantees in order to grow
system, thereby increasing its contingent obligations. However,
Wyndham to limit its use of performance guarantees going forward
- mainly using
them to bolster the competitive position of its upscale hotel
Fitch believes the company has attributes commonly associated
buyout (LBO) targets, such as a high FCF yield and a diverse set
business with varied cash flow profiles and return
characteristics. This risk is
heightened in the current accommodative credit environment.
However, several factors mitigate the potential credit risk from
including change of control provisions in its bond indentures
and the limited
leveragability for some of its businesses. Fitch also notes that
Wyndham's publicly traded peers are committed to an investment
At Dec. 31, 2013, cash of $194 million, $1.3 billion of
availability (less CP
and letters of credit) under its corporate revolving credit
facility, and $388
million of availability under its two-year vacation ownership
underpinned the company's ample liquidity position.
Wyndham has a sizable and well-established consumer financing
to its timeshare business. Term securitization transactions of
receivables provide an additional source of liquidity. Recent
have been favorable. Market accessibility was better than
through the recent recession, although transaction terms were
favorable than the current financing environment.
Wyndham has no major debt maturities during the next four years.
The company had
$210 million in CP outstanding as of Dec. 31, 2013.
--Fitch has set Wyndham's core lease-adjusted leverage target at
3.25x with a
cap of 3.5x for an IDR of 'BBB-', Stable Outlook. There is only
tolerance in the current rating/Outlook for leverage at or above
3.5x on both an
annual and quarterly basis. Fitch allows for leverage to be
slightly above its
target level at 'BBB-' due to Wyndham's strong FCF profile.
lease-adjusted leverage (excluding securitized timeshare debt
financing income) was 3.4x as of Dec. 31, 2013.
--Wyndham's off-balance-sheet commitments have increased
recently and further
increases could have a negative impact on the ratings and/or
--Wyndham's current FCF/debt ratio is 21.3%, which is very
strong for the rating
category. If the company's FCF/debt deteriorated to below 15%
company reducing leverage to within 3.25x, there would be
negative pressure on
--Negative rating pressure could result if Fitch's outlook for
spending and the capital intensity of the company's businesses
were to increase
--Reducing and sustaining leverage at around 2.75x and the
adoption of more
conservative financial policies could result in upward momentum
ratings/Outlook. Fitch does not expect this to occur.
Fitch has affirmed the following ratings:
Wyndham Worldwide Corporation
--IDR at 'BBB-';
--Short-term IDR at 'F3';
--CP at 'F3';
--$1.5 billion senior unsecured credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Fitch has assigned the following ratings:
Wyndham Global Finance PLC
--Short-term IDR at 'F3';
--CP at 'F3'.
Stephen Boyd, CFA
Fitch Ratings, Inc.
New York, NY 10004
Michael Paladino, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings
and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--â€˜2014 Outlook: Cross-Sector Lodging & Timeshare (The
Penthouse View)â€™ (Dec.
--â€™Inn the Footnotes: Comparison of Adjusted Credit Metrics
and Contingency Risk
for U.S. Lodging C-Corpsâ€™ (Jan. 7, 2011).
Applicable Criteria and Related Research:
Inn the Footnotes: Comparison of Adjusted Credit Metrics and
for U.S. Lodging C-Corps
2014 Outlook: Cross-Sector Lodging & Timeshare (The Penthouse
Corporate Rating Methodology: Including Short-Term Ratings and
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