Dec 5 - Fitch Ratings has assigned a 'BBB' rating to Starwood Hotels &
Resorts Worldwide Inc.'s (Starwood) proposed issuance of 10-year senior
unsecured notes. The Rating Outlook is Stable.
The proceeds from the offering will be used to partially fund the company's cash
tender offer announced on Nov. 26, 2012. The cash tender offers to purchase up
to $515 million of notes, including up to $325 million of its 7.875% senior
notes due 2014, up to $125 million of its 7.375% senior notes due 2015, up to
$40 million of its 6.75% senior notes due 2018, and up to $25 million of its
7.15% senior notes due 2019.
The notes will be pari passu with all of the company's existing debt. The notes
will include an obligation of Starwood to repurchase the notes at 101% upon
change of control.
Starwood has actively addressed its upcoming maturity schedule over the last few
years, mostly funded with internal cash. It has reduced its non-securitized debt
levels from $4 billion at year-end 2008 to $1.7 billion as of Sept. 30, 2012. As
of Sept. 30, 2012, Fitch calculates core lease adjusted leverage (excludes
consumer financing profit and securitized debt) at roughly 1.8x and consolidated
lease adjusted leverage (includes consumer financing profit and securitized
debt) at 2.1x, within Starwood's publicly stated long-term leverage target of
2.0x - 2.5x.
Core lease-adjusted leverage is comfortably within Fitch's target for Starwood
of below 2.75x for a 'BBB' IDR, giving the company ample financial flexibility
at current ratings. Despite positive lodging fundamentals, Fitch maintains the
Rating Outlook at Stable as it does not anticipate the company will manage its
balance sheet to support a higher rating.
U.S. RevPAR has increased 6.7% year-to-date according to Smith Travel, ahead of
Fitch's updated full-year outlook of 6.5%. Starwood's September YTD RevPAR
performance of +3.3% (as reported) has lagged peers and US Smith Travel index,
which is mostly attributable to currency due to its high international exposure.
Starwood's ratings continued to be supported by:
--Lodging demand trends that continue on a solid recovery trajectory in a low
supply growth environment.
--The company's improved financial profile that it is commensurate with Fitch's
investment grade parameters for the company.
--The company being the most globally diversified lodging operators with
significant exposure to highly attractive gateway cities.
--The company's continued transition to a more asset light business model.
Rating concerns include:
--The inherent cyclicality of the lodging and timeshare businesses.
--The potential for greater cash flow volatility from Starwood's heaver asset
base and its exposure to higher end segments.
Fitch believes management will increasingly focus capital allocation decisions
on growth investments, potential acquisitions and shareholder friendly
initiatives, within the context of maintaining its 'BBB' rating. Starwood
announced on Dec. 1, 2011 that its board authorized a $250 million share
repurchase authorization (see Fitch's comment, 'Starwood's Ratings Unaffected
from Share Repurchase Authorization' dated Dec. 5, 2011). Further, on Oct. 25,
2012, the company announced a 150% increase in its annual dividend to $1.25 per
share (roughly $245 million).
Starwood's liquidity profile is solid, with cash of $651 million at the end of
3Q'12. Including full availability under its recently restated $1.75 billion
credit facility due February 2018, total liquidity was nearly $2.4 billion. Pro
forma for the increased dividend, Fitch's base case reflects Starwood will
generate modest discretionary annual free cash flow (FCF) in 2012 and 2013,
excluding proceeds from additional timeshare securitizations and Bal Harbour
residential sales proceeds (company disclosed Bal Harbour will generate at least
$400 million in net cash flow in 2012).
WHAT COULD TRIGGER A RATING ACTION
Positive: Upside to the rating could occur if management committed to a leverage
target below 2.25x through a lodging cycle with a compelling rationale for more
conservative leverage thresholds.
Negative: Rating pressures could occur if Starwood indicates it will operate
with a more aggressive financial policy, with leverage above Fitch's 2.75x
target for a sustained period of time.
Fitch currently rates Starwood as follows:
--Issuer Default Rating at 'BBB';
--$1.75 billion senior unsecured credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk
for U.S. Lodging C-Corps' (Jan. 7, 2011);
--'2012 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View' (Jan.
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk
for U.S. Lodging C-Corps
2012 Outlook: Cross-Sector Lodging & Timeshare -- The Penthouse View
Corporate Rating Methodology