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-- Global hotel chain operator Marriott has announced plans to issue $300 million of senior unsecured notes due 2022, the proceeds of which it will use for general corporate purposes.
-- We are assigning our 'BBB' issue-level rating to the proposed notes.
-- The stable rating outlook reflects our belief that Marriott will make financial policy choices over the next several years that will enable it to sustain credit measures in line with our current rating. Rating Action On Sept. 5, 2012, Standard & Poor's Ratings Services assigned its 'BBB' issue-level rating to Bethesda, Md.-based Marriott International Inc.'s proposed $300 million notes due 2022. Marriott expects to use the proceeds for general corporate purposes. All other ratings remain unchanged. Rationale Standard & Poor's corporate credit rating on Marriott reflects our assessment of the company's business risk profile as "strong" and our assessment of its financial risk profile as "significant," according to our criteria. Our assessment of Marriott's business profile as strong is based on its sizable, good-quality system of hotels targeting multiple price points, its experienced management team, its focus on managing and franchising hotels rather than on ownership, favorable long-term demographic trends and increasing travel patterns across the world, and a geographically diversified portfolio of quality brands. These factors are tempered by the cyclical nature of lodging and the revenue and cash flow variability Marriott experienced during the last downturn, and the susceptibility of the travel and leisure industry to global political and financial events. Our assessment of Marriott's financial risk profile as significant reflects our expectation that Marriott will likely sustain total debt to EBITDA in the 3.0x-3.25x range on average and funds from operations (FFO) to total debt in the 25% to 30% range. Marriott's worldwide systemwide comparable RevPAR increased 6.7% in constant dollars in the June 2012 quarter, and our measure of the company's EBITDA grew by 16% (excluding the spun timeshare unit and unconsolidated joint-venture EBITDA). The group booking pace for company operated Marriott hotels is up 10% for the remainder of 2012 and up 8% for 2013. Marriott increased the pace of share repurchases in the second quarter to $400 million, compared to $150 million in the first quarter; however, the annualized pace is slower than the $1.425 billion the company repurchased in 2011. In addition, Marriott announced it is buying the Gaylord Hotel brand and management rights for $210 million, although the anticipated fourth-quarter 2012 closing requires Gaylord shareholder approval and the company's reorganization into a REIT. Also, Marriott raised its 2012 investment spending range to $850 million to $950 million, increasing the midpoint by $200 million. Total lease-adjusted debt to EBITDA was about 3x and FFO to total lease-adjusted debt was 32%. These measures are good compared to our 3.5x maximum debt to EBITDA and 25% minimum FFO to total debt thresholds for the 'BBB' rating, and in line with Marriott's current financial policy of keeping leverage between 3.0x and 3.25x. The rating is also supported by a good overall global lodging environment. Hotel room demand in the U.S. and in many major global markets where Marriott has a presence achieved sustained levels of growth in 2011, and we believe demand for lodging will increase again in 2012, although at a more moderate rate. In the U.S., demand increased 5% in 2011 and we expect it will improve around 3% in 2012 and 2% in 2013, whereas supply growth will be muted at less than 1% in 2012 and just more than 1% in 2013. As a result, we believe occupancy will likely grow to about 62% in 2012 and 2013, and the increase in average daily rate will likely be the majority of U.S. RevPAR growth in 2012 and 2013. These drivers would translate into a U.S. RevPAR increase between 5% and 7% in 2012 and in the mid-single-digit area in 2013. Given our U.S. RevPAR expectation for 2012, we believe Marriott's current expectation for worldwide, systemwide constant dollar RevPAR to grow 6% to 8% in 2012 is reasonable. Its operations are weighted toward higher priced lodging segments that we expect to experience faster RevPAR growth on average during cyclical growth periods than the overall industry. In addition, RevPAR improvements in some international markets, particularly in the Asia-Pacific region, have provided support for Marriott's RevPAR and earnings. Key aspects of our operating performance expectations are:
-- The company lowered guidance for 20,000 to 25,000 rooms to open in 2012 because of some international room openings slipping into 2013, from 25,000 to 30,000 rooms previously.
-- As a result of RevPAR and room growth, we believe franchise and base management fees (which we expect to represent about 75% of 2012 EBITDA) will grow in the high-single-digit area in 2012. Marriott reported it would have generated $60 million in timeshare franchise fees in 2011 assuming the timeshare unit was spun off during all of 2011. We have assumed a similar level of timeshare franchise fees in 2012 in our fee growth expectation. Marriott reported $27 million in timeshare franchise fee revenue in the 24 weeks ended June 15, 2012.
-- We believe Marriott's relatively small owned and leased hotel segment (an estimated 10% of 2012 EBITDA) will generate around a 10% increase in EBITDA in 2012.
-- We have assumed incentive fees (an estimated 14% of 2012 EBITDA) increase around 15% in 2012. This is based on our expectation for Marriott's RevPAR growth in 2012 and a rough estimate for hotel profit growth of 2x RevPAR growth. We acknowledge that our growth range is conservative compared with Marriott's incentive fee guidance for an increase of 20%, and that the company's guidance incorporates specific contractual terms and hotel profit forecasts across its portfolio of management agreements.
-- We expect total EBITDA (pro forma for the timeshare spin) will increase in the low-teen percentage area in 2012.
-- Our preliminary assumption incorporated into the current rating is that Marriott's RevPAR grows in the mid-single-digit area and EBITDA increases in the high-single-digit area in 2013. Liquidity Based on likely sources and uses of cash over the next 12 to 18 months, Marriott has an "adequate" liquidity profile, according to our criteria. Relevant elements of its liquidity profile are:
-- We expect sources of liquidity to exceed uses by at least 1.2x.
-- Net sources of liquidity would remain positive, even if EBITDA declines by 15%.
-- We believe Marriott has high standing in credit markets and a solid relationship with its banks.
-- We expect the cushion relative to Marriot's 4x leverage covenant to remain good, and believe the company would not violate the covenant even if EBITDA unexpectedly declines by 15%. We expect Marriott to generate around $900 million in operating cash flow in 2012. Additional sources of liquidity are provided by borrowing capacity of $1.271 billion under a $1.75 billion credit facility due June 2016, and $105 million in cash at June 15, 2012. Marriott's commercial paper program is backed up by its revolving credit facility. The terms of the credit facility are aligned with our criteria and include the ability to make same-day drawings and diverse bank group participation. We expect Marriott to sustain an approach to financial risk management and share repurchases in line with our rating. The company's liquidity profile benefits from the ability to reduce spending when the lodging cycle turns downward. Marriott expects total investment spending in 2012 of $850 million to $950 million, including approximately $100 million in maintenance capital spending, and the remainder in development spending, acquisitions, mezzanine financing and other loans, and equity and other investments (including the $210 million payment associated with the pending Gaylord transaction). Marriott has $400 million in notes due February 2013 and only a modest amount of maturities in 2014. We believe Marriott will use its revolver capacity or the capital markets to refinance debt when it comes due. Outlook Our stable rating outlook on Marriott reflects our belief that it will make financial policy choices over the next several years that will enable it to sustain adjusted leverage between 3.0x and 3.25x, and FFO to total adjusted debt between 25% and 30%--in line with our rating. The measures will provide a cushion versus our 3.5x maximum debt to EBITDA and 25% minimum FFO to total debt thresholds for a 'BBB' rating. The timing and magnitude of inflection points in lodging industry performance have proven to be difficult to forecast with accuracy over several cycles, and we expect Marriott to incorporate this into its decisions regarding investments and share repurchases in future periods. We could lower our rating if Marriott adopts a more aggressive leverage policy, or if spending on investments and share repurchases results in a thinning cushion compared with our 3.5x maximum debt to EBITDA, and 25% minimum FFO to total debt thresholds for a 'BBB' rating, particularly at this point in the lodging cycle. A possible upgrade is unlikely, given Marriott's stated leverage policy. Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Marriott International Inc. Corporate Credit Rating BBB/Stable/A-2 New Rating Marriott International Inc. Senior Unsecured $300 mil notes due 2019 BBB