Feb 19 - Fitch Ratings has assigned an initial 'BBB-' Issuer Default Rating
(IDR) to Wyndham Worldwide Corp. (Wyndham). Fitch has also assigned a
rating of 'BBB-' to Wyndham's proposed issuance of senior unsecured notes. The
Rating Outlook is Stable. A full list of rating actions follows at the end of
Wyndham has announced that it will be issuing five- and 10-year senior unsecured
notes that rank pari passu with all existing notes and credit facility. The
proceeds will be used to repurchase existing debt and for general corporate
purposes. On Feb. 6, 2013, the company announced an any and all tender offer of
its 5.75% notes due 2018 and 7.375% notes due 2020. Fitch expects today's
issuance will be leverage neutral to Wyndham.
The ratings reflect Wyndham's strong free cash flow (FCF) profile, its focus on
an asset-light/fee-driven business model, strong market position in all of its
businesses, and management's public commitment to maintaining investment-grade
Rating concerns include the company's high exposure to the more capital
intensive timeshare industry, cyclicality in the lodging and timeshare
businesses, material working capital swings, and leverage being managed at the
high-end of Fitch's target level for the given rating and business risks.
STRONG FREE CASH FLOW GENERATION
Since rightsizing its timeshare business in 2008, the company has generated
strong annual FCF. At year-end 2012, the company generated FCF (after dividends)
in the amount of $662 million, or roughly 25% of its total core debt balance
(excludes securitized debt). Fitch expects FCF/debt will remain between 15% and
20% over the next few years, with most of the deterioration coming from dividend
Most of Wyndham's business is asset-light and fee-driven, with the exception of
vacation interval sales. Approximately 60% of total revenues are fee-driven.
Fitch's expectation is that management will continue to focus on asset-light
alternatives in the timeshare segment (e.g., Wyndham Asset Affiliation Model
and management fee revenue) in addition to maintaining its current
asset-light, fee-driven lodging and vacation exchange and rentals models.
The ratings reflect the addition of owned properties, which will be used for
Wyndham's mixed use (lodging and timeshare) concept. Fitch expects the company's
main focus to be on the franchising of its hotel brands with the mixed use
concept comprising a small component of its overall strategy.
POSITIVE LODGING FUNDAMENTALS
Wyndham is primarily a franchisor of midscale and economy hotel brands in the
U.S. (roughly 80% of current room count is in the U.S.). U.S. demand trends
remain strong, although growth is moderating as the current lodging cycle
matures. Fitch expects weaker growth in 2013 with a conservative U.S. RevPAR
base case scenario of +4.5%. U.S. RevPAR grew 6.8% in 2012 and 8.2% in 2011,
according to Smith Travel.
Fitch expects Wyndham's RevPAR performance to be slightly below the industry
average at this stage of the lodging cycle, as hotels in the mid-to-lower end
segments generally have less pricing power than ones in the upper-scale
The industry is currently benefitting from high occupancy rates and low supply
growth, which is leading to greater pricing power. Fitch believes that supply
growth has reached a trough, with supply growing at only 0.5% in 2012. However,
Fitch expects U.S. supply growth will remain below 1% in 2013 and well below its
long-term historical average of 2% in 2014.
DIFFERENTIATED SEGMENT: EXCHANGE & RENTALS
The vacation exchange and rentals segment differs from the traditional
businesses of other high-profile lodging companies. Fitch views them as a modest
positive contributor to Wyndham's business profile risk. Vacation exchange and
rentals comprises roughly 30% of the company's revenue and EBITDA and is almost
entirely fee-driven, with 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 lodging and timeshare segments. In addition, it has a
fairly flexible cost structure allowing for easier cost reductions during a
Scale is a significant barrier to entry in the vacation exchange industry
because a large amount of resorts are needed to make it an attractive exchange.
The industry is essentially a duopoly. Wyndham's vacation exchange, RCI, has
over 4,000 vacation ownership resorts and competes mostly with Interval Leisure
Group, Inc., which has approximately 2,700 resorts.
Near-term business risk is slightly elevated in Wyndham's rentals business due
to its exposure to Europe and its small ownership position in several assets.
However, it remains largely an attractive fee-for-service business that
complements its other business lines well. Wyndham maintains a strong and
growing competitive position, which should enable it to capitalize on
opportunities in the fragmented rentals industry. This may present some M&A
risk, but Fitch believes most acquisitions would be bolt-on rather than
transformative and asset heavy.
HIGH EXPOSURE TO TIMESHARE
Fitch generally views the timeshare industry less favorably than lodging. Fitch
estimates that roughly half of Wyndham's revenues and slightly less than half of
its EBITDA comes from timeshare operations. The industry is currently in a stage
where development spending is low compared to historical levels due to the high
supply growth and demand slowdown that occurred prior to and during the past
recession. Longer-term, cash flows for timeshare companies will eventually
become more volatile as higher development spending will be needed to build new
Wyndham has reduced its cash flow volatility exposure by focusing on recurring
management fees as evidenced by its acquisition of Shell Vacations, which mostly
consists of already sold inventory. Wyndham also has implemented alternative
models that are less capital-intensive, such as WAAM. The WAAM models allow
Wyndham to either sell other developers' inventory into Wyndham's timeshare
network for a fee or buy inventory on nearly a just-in-time basis once Wyndham
has a subsequent buyer in place.
Fitch does not expect a significant ramp up in development spending over the
next few years. Rather, Fitch expects the company will continue to seek
asset-light alternatives in addition to modest inventory spending of roughly
$150 million annually as it works through existing inventory. Longer-term, the
ratings incorporate Fitch's assumption that inventory spending will ramp up
modestly, resulting in a continued solid FCF profile.
INCREASED CONTINGENT LIABILITIES
The ratings reflect increased contingent liabilities from its recent management
agreements with FelCor and Hospitality Properties Trust (HPT). Fitch does not
expect the company to deviate materially from its lodging franchisor business
model. However, Fitch recognizes the company may need to enter into management
agreements, which may increase contingencies through performance guarantees, in
order to grow its hotel supply and bolster the competitive position of its more
upscale hotel brands.
Such contingencies are factored into the ratings through an analysis of
Wyndham's liquidity position and the potential impact to increased leverage as a
result of having to fund some, or all, of the contingency amount.
Fitch recognizes the company has some common characteristics of an LBO
candidate, particularly a strong FCF profile, a historical valuation discount to
peers, and the potential perception of a misunderstood business model. This risk
is heightened in the current accommodative credit environment.
However, there are several mitigants, including change of control provisions in
its bond indentures, the company's competitors are largely investment grade
issuers, and there is limited leveragability on some of its businesses.
Wyndham's ample liquidity position is supported by $195 million of cash, $631
million of availability (less commercial paper and letters of credit) under its
corporate revolving credit facility, and $460 million of availability under its
two-year vacation ownership conduit facility as of Dec. 31, 2012.
Wyndham has a sizable and well-established consumer financing business related
to its timeshare business. Term securitization transactions of timeshare
receivables provide an additional source of liquidity and recent transaction
terms have been favorable. Market accessibility was better than Fitch's
expectations through the recent recession, although transaction terms were much
less favorable than the current financing environment.
The company's maturity schedule is favorable with no major maturities coming due
over the next four years. The company had $273 million in commercial paper
outstanding, as of Dec. 31, 2012.
The company will continue to have a negative drain on working capital from its
timeshare contract receivables. Fitch expects future changes in working capital
to be roughly negative $200-$250 million, with a slight uptick coming from
increased development spending on timeshare inventory.
SENSITIVITY/KEY RATING DRIVERS
--Fitch calculates year-end 2012 core lease-adjusted leverage of 3.35x. Fitch
believes this is at the higher-end of the range it expects Wyndham to manage its
balance sheet, though we expect leverage will remain around current levels in
the near term. Fitch's core lease-adjusted leverage target (excludes securitized
debt and consumer financial profit) for an IDR of 'BBB-/Stable Outlook' is
3.25x, with a cap of 3.5x. There is little tolerance in the current
rating/outlook for leverage at or above 3.5x. Fitch allows for leverage to be
slightly above its target level at 'BBB-' due to its strong FCF profile.
--Wyndham's current FCF/Debt ratio is 25%, which is very strong for the rating
category. If the company's FCF/debt deteriorated to below 15% without the
company reducing leverage to within 3.25x there would be negative pressure on
--Negative rating pressure could result if Fitch's outlook for development
spending and the capital intensity of the company's businesses were to increase
--There could be positive ratings momentum if the company reduced its leverage
and adopted more conservative financial policies. Fitch does not expect this to
occur in the near term, but upward rating momentum could ensue if core
lease-adjusted leverage were reduced to around 2.75x while maintaining a solid
FCF profile, and management instituted the policy to maintain leverage around
Fitch has assigned Wyndham the following ratings:
--Short-term IDR 'F3';
--Commercial paper 'F3';
--$1 billion senior unsecured credit facility 'BBB-';
--Senior unsecured notes '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);
--'2013 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View' (Dec.
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (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
2013 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates