November 16, 2017 / 9:36 PM / a month ago

Fitch Affirms Marriott at 'BBB'; Maintains Positive Outlook

(The following statement was released by the rating agency) NEW YORK, November 16 (Fitch) Fitch Ratings has affirmed Marriott International's (NYSE: MAR) Long-Term Issuer Default Rating (IDR) at 'BBB' and Short-Term IDR at 'F2'. The Rating Outlook remains Positive. Fitch has also affirmed Starwood Hotels & Resorts Worldwide, Inc.'s IDR at 'BBB' and maintained the Positive Rating Outlook. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS The Positive Outlook considers the added scale and diversification stemming from Marriott's 2016 acquisition of Starwood Hotels & Resorts, Inc., in the context of an unchanged financial policy that includes managing adjusted leverage at its stated 3.0x-3.25x target. The combined company's lower business risk profile will provide Marriott with greater cushion to navigate future lodging cycle downturns. Marriott has performed well against the considerations Fitch identified for positive rating momentum at the time the Starwood acquisition was announced, including continued rooms system growth (a measure of franchisee satisfaction) and returning leverage to its policy target range. To resolve the Positive Outlook, Fitch will consider Marriott's relative gross and net unit growth and achievement of anticipated cost synergies during the one- to two-year Rating Outlook horizon, in the context of continued financial policy adherence. Fitch would consider revising Marriott's Outlook to Stable if the company adopts less conservative financial policies, which could include targeting leverage above its current range of 3.0x-3.25x. To that end, Fitch believes Marriott is committed to maintaining a 'BBB' rating, and that the company does not presently see strategic reasons for targeting a higher rating. Increased Scale and Diversity: The Starwood acquisition lowered Marriott's business risk profile by enhancing the size and quality of its brand portfolio and strengthening the company's competitive position in advanced emerging markets. Marriott controls the largest and most diverse global hotel rooms system, spanning more than 6,400 hotels with 1.2 million rooms across 30 internationally recognized brands. The acquisition also bolsters Marriott's loyalty rewards system, adding Starwood Preferred Guest (SPG) members and its strong base of affluent leisure and millennial travelers who favor Starwood's lifestyle-oriented brands. Cost synergies of $250 million, primarily stemming from the elimination of duplicative functions and scale economies, will lower the combined company's fixed cost structure and increase its FCF margin following the planned sale of approximately $1.5 billion of legacy Starwood-owned hotels and other Marriott assets. Financial Policy Unchanged: Fitch's ratings case projections assume the company sustains leverage within its stated 3.0x-3.25x target range through 2021. The increased scale from the Starwood combination has lowered Marriott's business risk profile, making the company's long-standing leverage targets consistent with a 'BBB+' rating. Marriott did not revise its leverage policy target for other meaningful events that lowered its business risk profile and cyclicality prior to acquiring Starwood, including the spinoff of its more cyclical and capital-intensive timeshare business during 2011. Marriott delevered back to its 3.0x-3.25x policy target earlier than expected after the acquisition, although leverage temporarily increased above Fitch's expectations as the company raised its offer after an investor consortium made a competitive bid for Starwood. Capital-Light Business Model: The ratings consider Marriott's long-term focus on a capital-efficient, asset-light, recurring fee business model. Fitch estimates that most of Marriott's operating profit is generated from management and franchise fees, and to a lesser extent brand-licensing revenues from third-party timeshare and credit card operators. Marriott has moved swiftly to complete Starwood's owned asset disposition program by selling, and taking back long-term franchise and/or management contracts for, owned hotels with approximately $1.5 billion of company estimated proceeds. Franchisee Reaction Key to System Growth: Fitch sees moderate execution risk related to the transaction, primarily from the company's franchisee relationships. This risk encompasses the combined company's ability to attract and retain franchisees to its system and is likely to play out over many years as existing Marriott and Starwood franchise and management contracts expire. The company has delivered healthy gross and net rooms system growth post acquisition close. However, the short combined operating history and staggered contract maturity schedule prevents drawing definitive conclusions. Fitch expects Marriott's rooms system to grow within a range of 5%-7% through the 2021 rating case forecast period. Marriott's system deletions will likely be at the high end of their historical range of 1%-1.5% of rooms per annum as the company addresses underperforming (primarily Sheraton branded hotels) upon contract expiry. Marriott is generally requiring underperforming hotels to make large capital investments to improve properties to brand standards, or exit the system. Stronger performing hotels are likely to renew to avoid business interruption risk and switching costs. However, in North America owners have been opting for franchise-only renewals and outsourcing management to less expensive independent third-party hotel operators. Marriott and Starwood each own hotel brands that compete head-to-head in the marketplace. This could result in an elevated level of brand and/or management contract losses if existing Starwood and Marriott franchisees opt to "re-flag" their properties. Also, some hotel owners have historically expressed a preference for Starwood over Marriott, and vice versa. These owners may opt to re-flag their hotels when contracts expire - regardless of whether a competitive Marriott branded hotel is nearby. Some merger-related aspects will benefit franchisees, helping to offset the above considerations. The breadth and depth of the combined company's loyalty rewards system will be unmatched in the industry, and the company should benefit from lower administrative costs from combining the programs. The merger should also reduce costs for franchisees in several areas, including training and recruiting, inventory procurement, credit card processing, accounting, IT and revenue management. Industry Fundamentals Weakening: Fitch's through-the-cycle approach incorporates cyclicality into ratings. However, an industry downturn that exceeds our negative 13%-15% RevPAR stress case assumption could lead to negative ratings momentum for U.S. lodging companies. Fitch expects U.S. RevPAR to be flat to up 2% during 2018, mostly due to ADR growth; (global operators such as Marriott should benefit from stronger, mid-single-digit RevPAR growth in select international markets in Europe and Asia). Full-service U.S. hotels will outperform select service due to lower supply growth. Leisure demand will show the greatest relative strength, followed by association and corporate group business. Corporate transient demand will trail, based on flat occupancy and 1%-2% growth in corporate negotiated rates. Government per diems (5% of industry demand) are up 3%-4% next year. Industry supply growth is manageable, near its 2% average, but RevPAR will remain under pressure in oversupplied markets, such as New York City. DERIVATION SUMMARY Marriott is the largest global lodging brand owner/operator, with a highly competitive and widely diversified brand portfolio. The company's continued conservative financial policy following the Starwood acquisition is a key factor reflected in the Positive Outlook on the 'BBB' IDR. Marriott's large and diverse rooms system and sizeable loyalty program are key differentiators to peers such as Wyndham Worldwide Corp. (BBB-/RWN), as is Wyndham's exposure to more volatile vacation ownership. A capital-light, recurring franchise and management fee business model reduces cash flow volatility relative to hotel owners like Host Hotels & Resorts, Inc. (BBB/Stable) because of their lower operating leverage and minimal recurring capex needs. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - U.S. RevPAR decelerates in second-half 2017, but remains modestly positive through 2018. - Weakness in North America is offset by decelerating, but positive, international growth. Marriott's systemwide RevPAR increases roughly 2% in each of 2017 and 2018, is flat in 2019 and increases roughly 1% in 2020. - Fee revenues in the mid- to high-single digits with system growth across the managed and franchised segment driving most of the gains. Global fees per room increase in the range of 0%-3%. - Fitch expects Marriott to return excess FCF to shareholders through dividend increases and share repurchases, regulating the latter to maintain lease-adjusted leverage within Fitch's 3.0x-3.25x target at the 'BBB' rating. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -To resolve the Positive Outlook, Fitch will consider the company's relative gross and net unit growth and achievement of cost synergies during the one- to two-year Rating Outlook horizon. -Fitch would consider revising the Outlook to Stable from Positive if management changes its financial policy and opts to maintain leverage at a level higher than 3.0x-3.25x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -A negative rating action could also occur if a lodging industry downturn occurs that is more severe than Fitch's stress case scenarios, which contemplates industrywide RevPAR declines of 13%-15%. Due at least in part to the more attractive supply growth environment relative to the last recessions, Fitch believes RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 to 2009. -Fitch expects Marriot to pull back on investment spending and share repurchases, as well as its CP balance in the event of a significant downturn. A negative rating action could take place if Marriott chose not to adjust its capital allocation in a downturn scenario. -Marriott's 'F2' Short-Term rating is supported by back-up liquidity coverage from its revolivng credit facility (RCF) and sufficient internally generated sources of liquidity to amply cover near-term debt service. If these liquidity measures deteriorate over time, there could be pressure on the 'F2' rating. LIQUIDITY Marriott has adequate liquidity underpinned by its committed RCF. At Sept. 30, 2017, $1.7 billion of total liquidity was composed of $1.2 billion of revolver availability and $508 million of unrestricted cash. In connection with the Starwood acquisition, the company expanded the capacity of its revolver, and the CP programs it backs to $4 billion and extended maturity to June 2021. FULL LIST OF RATING ACTIONS Fitch has affirmed the following: Marriott International, Inc. --Long-Term IDR at' BBB'; --Short-Term IDR at 'F2'; --Senior unsecured credit facility at 'BBB'; --Senior unsecured notes at 'BBB'; --Commercial paper at 'F2'. Starwood Hotels & Resorts Worldwide LLC --Long-Term IDR at 'BBB'; --Senior unsecured notes at 'BBB'. Contact: Primary Analyst Stephen Boyd, CFA Senior Director +1 212 908 9153 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Michael Paladino, CFA Managing Director +1 212 908 9113 Committee Chairperson John C. Culver Senior Director +1 312 368 3216 Summary of Financial Statement Adjustments - Fitch excludes reimbursement-related revenues and related expenses. - Fitch excludes non-cash stock-based compensation, merger-related costs and other non-operating and non-recurring expenses and charges have been excluded from the calculation of EBITDA/R. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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