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TEXT - S&P rates FelCor Lodging LP senior notes 'B-'
December 12, 2012 / 4:10 PM / in 5 years

TEXT - S&P rates FelCor Lodging LP senior notes 'B-'

Overview
     -- U.S.-based FelCor Lodging L.P. is issuing $500 million senior secured 
notes due 2022 and using the proceeds to repay debt.
     -- We are assigning the notes our 'B-' issue-level rating with a recovery 
rating of '3'.
     -- The stable outlook reflects credit measures that we expect to be in 
line with the current rating through 2013.

Rating Action
On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed all existing 
ratings, including the 'B-' corporate credit rating, on Irving, Texas-based 
FelCor Lodging L.P. The outlook is stable.

At the same time, we assigned the company's proposed $500 million senior 
secured notes due 2022 its 'B-' issue-level rating (at the same level as our 
'B-' corporate credit rating on FelCor Lodging Trust Inc.). We also assigned 
this debt a recovery rating of '3', indicating our expectation for meaningful 
(50% to 70%) recovery for lenders in the event of a payment default. The 
company expects to use the proceeds from the proposed notes to repay the 
$186.5 million outstanding principal on its mortgage debt due 2015, pay a 
portion of the company's 10% senior secured notes due 2014, and pay fees and 
expenses related to the transaction.

We also placed our issue-level rating on the company's 10% senior secured 
notes on CreditWatch with positive implications. The repayment of a portion of 
the company's 10% senior secured notes using the proposed notes proceeds would 
result in a lower level of secured debt outstanding under our simulated 
default scenario compared with our previous analysis. This would increase the 
recovery prospects for the 10% senior secured notes enough to warrant an 
upward revision to our recovery rating on the notes. Upon closing of the 
proposed senior secured notes, we expect to revise our recovery rating on the 
10% senior secured notes to '1' (90% to 100% recovery expectation) from '3' 
(50% to 70% recovery expectation) and raise our issue-level rating to 'B+' 
(two notches higher than the corporate credit rating) from 'B-' (the same as 
the corporate credit rating), in accordance with our notching criteria.

Rationale
Our corporate credit rating reflects our assessment of the company's financial 
risk profile as "highly leveraged" and our assessment of the company's 
business risk profile as "fair," according to our criteria.

Our assessment of FelCor's financial risk profile as highly leveraged reflects 
very high debt levels, with our measure of lease- and preferred stock-adjusted 
total debt to EBITDA in the low-10x area (pro forma for the proposed 
transaction) and funds from operations (FFO) coverage of interest and 
preferred dividends anticipated to be in the low-1x area at the end of 2012. 
We expect leverage to improve to the low-9x area and coverage to remain in the 
low-1x area at the end of 2013. These measures incorporate the completed sale 
of 10 hotels in 2012 for an estimated $207 million in gross proceeds, and the 
expected sale of an additional 10 hotels in 2013 for approximately $235 
million in gross proceeds based upon FelCor's current estimates. Slightly 
offsetting high leverage and weak coverage measures is our expectation for 
revenue per available room (RevPAR) growth in the U.S. lodging industry 
through 2014.

Our assessment of FelCor's business risk profile as fair is based on its 
geographically diversified hotel portfolio in the U.S. and its good 
relationships with key brand owners. Risk factors include FelCor's reliance on 
external sources of capital for growth as a REIT, the cyclical nature of the 
lodging industry, and the associated revenue and earnings volatility of the 
company's owned hotel portfolio. Additionally, concurrent with completed and 
planned hotel sales, the company recently completed hotel acquisitions at high 
multiples and is investing in hotel development in order to expand its 
presence in the Manhattan hotel market. While we view the demand 
characteristics of the Manhattan market favorably, we believe FelCor's use of 
its balance sheet to pursue growth initiatives at high multiples will limit 
leverage reduction through 2013 stemming from the company's current 
significant asset sale program. Earlier this year, FelCor said it expects the 
Knickerbocker to be its last acquisition in this cycle.

Through the first nine months of 2012, same-store consolidated RevPAR at 
FelCor increased 5.1%, driven by a 5.8% increase in ADR and partially offset 
by a 50-basis-point decrease in occupancy. Displacement from renovations was 
the primary cause for the occupancy decline. Same-store adjusted EBITDA 
(excluding hotels sold or acquired during the year) increased approximately 
8%. FelCor recently lowered its guidance for 2012 same-store RevPAR to 5.25% 
to 5.75% from 5.5% to 6% due to the effects of Hurricane Sandy on some of the 
company's properties. Over the past year, FelCor completed several hotel 
transactions:
     -- In February 2012, FelCor announced the acquisition and redevelopment 
of the Knickerbocker Hotel in Times Square in a joint venture with manager 
Highgate Partners (FelCor owns 95%). The joint venture paid $115 million for 
the Knickerbocker land and shell currently in place, and will spend 
approximately $115 million to develop the hotel for a late-2013 opening. The 
aggregate cost is approximately $700,000 per key, and FelCor expects the 
property to generate $14 million in EBITDA in its first year of operation in 
2014 and ramp up to $25 million in 2016. 
     -- In June 2012, FelCor announced that it completed the sale of six out 
of a total 16 currently listed non-strategic hotels for $103 million as part 
of its planned asset sale program. FelCor said the purchase price represented 
a 6.8% capitalization rate based on 2011 net operating income. The company 
used the proceeds to repay $73 million in secured debt and other costs at 
closing and used the remaining $30 million of proceeds to pay down a portion 
of its $67.7 million in accrued preferred dividends on July 31, 2012. 
     -- In August 2012, the company sold one hotel for $25.5 million and in 
October 2012, the company sold two hotels for $70 million. The proceeds were 
used to repay a portion of the CMBS loan due 2013 and the remaining $38 
million of accrued preferred dividends on Oct. 31. In addition, the company 
closed five single asset mortgage loans totaling $160.8 million that mature in 
2022. A portion of the proceeds from the new loans was used to repay the $107 
million balance of the mortgage loan due 2014 and the remaining balance of the 
CMBS loan. The repaid 2014 mortgage loan was secured by a pool of seven 
hotels, including four of the five hotels mortgaged to support the new loans. 
The remaining three hotels that secured the repaid loan are now unencumbered.
     -- In November 2012, the company announced its plan to sell one hotel for 
$8.7 million. The proceeds of the sale will be used to repay a portion of the 
company's line of credit.

On its third-quarter earnings call, FelCor said it plans to close the sale of 
the remaining 10 hotels currently on the market in 2013. It has an additional 
10 hotels yet to be brought to market. Key aspects of our operating 
performance expectations for FelCor are:
     -- The rating is supported by the good expected lodging environment. We 
expect U.S. RevPAR to increase between 5% and 7% in 2012 and between 3% and 6% 
in 2013. 
     -- Given U.S. RevPAR strength, we believe management's RevPAR growth 
guidance for 2012 at FelCor is reasonable, and that the company could produce 
same-store EBITDA growth in the high-single-digit percentage area this year. 
We have incorporated into the rating that FelCor's RevPAR grows in the 
mid-single digits and EBITDA grows in the high-single digits in 2013. 
     -- However, primarily because of increased leverage from the 
Knickerbocker acquisition and redevelopment and a smaller number of hotel 
sales in 2012 than we previously expected, we believe FelCor's total lease- 
and preferred stock-adjusted debt to EBITDA will be in the low-10x (pro forma 
for the proposed transaction), and that FFO coverage of interest and preferred 
dividends will be in the low-1x area in 2012, with leverage improving to the 
low-9x area and coverage remaining in the low-1x area in 2013. 
     -- These measures incorporate the sale of 10 hotels in 2012 for $207 
million and the sale of the remaining 10 hotels currently on the market in 
2013 for approximately $235 million based upon FelCor's current estimates, and 
use of proceeds to eliminate the accrued preferred dividend in arrears and for 
debt repayment. 

Liquidity
Based on its likely sources and uses of cash over the next 12 to 18 months and 
incorporating our performance expectations, FelCor has an adequate liquidity 
profile, according to our criteria. Relevant expectations and assumptions in 
our assessment of FelCor's liquidity profile include: 
     -- We expect sources of liquidity over the next 12 to 18 months to cover 
uses by at least 1.2x. 
     -- Net sources of liquidity should remain positive, even if EDITDA 
declines by 15%. 
     -- FelCor's $225 million secured revolving line of credit imposes a 
minimum debt service coverage ratio (DSCR) of 1.35x between March 5, 2012, and 
March 4, 2013. Drawings under the revolver were $117 million at September 
2012, and coverage of debt service was significantly higher than the covenant 
level. The DSCR steps up to 1.4x between March 5, 2013, and Aug. 1, 2014, and 
to 1.5x thereafter. Starting Sept. 4, 2012, an additional financial covenant 
became effective: the loan-to-value ratio for collateralized properties cannot 
exceed 60%. 
     -- As a REIT, FelCor pays out at least 90% of its taxable income as 
dividends, and relies on external sources of liquidity and asset sales to fund 
growth.

As of September 2012, FelCor had $112 million in cash on hand and a $225 
million line of credit of which $117 million was drawn. Cash balances do not 
include restricted cash of $82 million, $65 million of which is currently 
pledged as collateral for a loan assumed to purchase the Knickerbocker. FelCor 
expects capital spending in 2012 to be $120 million and we expect FelCor to 
fund it with operating cash flow and cash balances.

In 2011, FelCor generated approximately $46 million in operating cash flow, a 
decline from $67 million in 2010, primarily on a decrease in accrued expenses 
and liabilities. In 2011, FelCor generated $161 million in net proceeds from 
common stock issuance and $133 million in net asset sale proceeds, largely 
used to finance hotel acquisitions and repay debt balances. In 2012, we expect 
FelCor to generate between $70 million and $80 million in operating cash flow. 
We expect approximately $115 million in spending related to the Knickerbocker 
redevelopment to occur over two years, partly funded with a bank construction 
loan. Through the nine months ended September 2012, FelCor received $207 
million in gross proceeds from asset sales, which it used for debt repayment 
and to eliminate the preferred dividend in arrears. Pro forma for this 
transaction, FelCor currently has no debt maturities until 2014.

Outlook
The stable rating outlook reflects credits measures that we expect to be in 
line with the current rating through 2013. The company is currently 
experiencing good operating momentum. However, notwithstanding the company's 
significant asset sale program, we expect FelCor's recent use of its balance 
sheet to pursue growth initiatives will likely result in modest leverage 
reduction through 2013. At the end of 2012, we expect our measure of adjusted 
leverage to be in the low-10x area (pro forma for the proposed transaction) 
and FFO coverage of interest and preferred dividends to be in the low-1x area. 
Also, these measures include a pro forma level of EBITDA from acquired hotels 
and exclude a pro forma level of EBITDA for planned hotel sales. We anticipate 
credit metrics will improve modestly in 2013 because of planned asset sales 
and continued lodging recovery.

A lower rating could result from an unexpected significant slowdown or 
downturn in the U.S. lodging industry, which would likely drive FFO coverage 
of interest and preferred dividends closer to 1x and strain FelCor's liquidity 
profile. A one-notch higher rating would require a sustained improvement in 
FFO coverage of interest and preferred dividends to at least the mid-1x area, 
as well as a reduction in the company's total adjusted debt to EBITDA to the 
mid-7x area.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed

FelCor Lodging Trust Inc.
Corporate Credit Rating                B-/Stable/--       

FelCor Lodging L.P.
 Senior Secured                         B-                 
   Recovery Rating                      3                 


FelCor Lodging Trust Inc.
 Preferred Stock                        CCC-               

Ratings Affirmed; CreditWatch Action
                                        To                 From
FelCor Lodging L.P.
 $636 mil. sr sec notes due 2014        B-/Watch Pos       B-
   Recovery Rating                      3                  3


New Rating
FelCor Lodging L.P.
 Senior Secured
  US$500 mil nts due 09/01/2022         B-                 
   Recovery Rating                      3

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