Spanish Hotel Group NH Hoteles Assigned 'B-' Rating; Outlook Stable

Transcription

1 Research Update: Spanish Hotel Group NH Hoteles Assigned 'B-' Rating; Outlook Stable Primary Credit Analyst: Jessica Goldberg, Madrid (34) ; Secondary Contact: Stefan Kirschner, Frankfurt (49) ; Recovery Analyst: Gemma Johnson, London (44) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Recovery Analysis Related Criteria And Research Ratings List DECEMBER 11,

2 Research Update: Spanish Hotel Group NH Hoteles Assigned 'B-' Rating; Outlook Stable Overview Spain-based European urban hotel operator NH Hoteles S.A. (NH) has issued 250 million senior secured bonds, a 250 million convertible bond, and put in place a 200 million senior term loan facility. The company used the proceeds to refinance its existing syndicated loan and repay a 56 million equity swap. We assess NH's business risk profile as "weak" and its financial risk profile as "highly leveraged." We are therefore assigning our 'B-' corporate credit rating to NH. We are also assigning our 'B' issue rating to NH's senior secured bonds. The stable outlook reflects our view that NH will maintain "adequate" liquidity and will benefit from stable economic conditions for its European operations. Rating Action On Dec. 11, 2013, Standard & Poor's Ratings Services assigned its 'B-' long-term corporate credit rating to Spain-based European urban hotel operator NH Hoteles S.A. (NH). The outlook is stable. At the same time, we assigned our 'B' issue rating to the 250 million senior secured bonds, due The recovery rating on the bonds is '2', indicating our expectation of "substantial" (70%-90%) recovery prospects in the event of a default. Rationale The ratings on NH reflect our assessment of the company's business risk profile as "weak" and financial risk profile as "highly leveraged". The final terms of the completed refinancing were broadly in line with our expectations when we assigned our preliminary 'B-' corporate credit rating to NH on Oct. 28, Our assessment of NH's business risk reflects our view of the company's business model, which is centered around the operation of owned and leased hotels (22% of total rooms under management). In our opinion, this concentration likely contributes to a high and relatively inflexible fixed-cost base. NH's Standard & Poor's-adjusted EBITDA margins of more than 20% in the current financial year are broadly in line with peers'. However, we DECEMBER 11,

3 think that in times of cyclical downturn, the pressure on the company's earnings will likely be higher than on more asset-light franchised or managed businesses. In addition, although we view mid-scale properties as having lower cost bases than luxury hotels, we believe that NH's key market segment has relatively low barriers to entry and is therefore more exposed to competition. Finally, we view NH's presence outside of Europe as relatively limited. That said, we believe that NH's current strategy could potentially strengthen its business risk profile in the medium term, although we see some execution risks. The company's strategy is to move to a more asset-light ownership model and toward a more upmarket segment, while restructuring its cost base to improve profitability. Our assessment of NH's financial risk profile reflects our projections for the company's credit metrics. A large share (about 75%) of the company's adjusted debt can be attributed to our operating lease adjustment, but even on an unadjusted basis, we view the level of projected financial debt to EBITDA as very high compared with NH's cash flow generation. In addition, NH's capacity to generate free cash flow will likely be heavily constrained over the coming years as the company embarks on an investment program. However, we understand that NH plans to finance some of its investments through asset disposals. We also understand that NH will benefit from "adequate" liquidity for the coming 12 months and has some flexibility to cut capital expenditures, if asset disposals do not materialize. NH operates in Europe--mainly in Spain, Italy, Benelux (the economic union between Belgium, the Netherlands, and Luxembourg), and Germany--and is the fifth-largest hotel operator in Europe by numbers of rooms (about 59,000). NH also has a small exposure to Latin America. NH mainly runs midscale hotels in urban areas. Our base case assumes: A low-single-digit percentage decline in revenues for 2014, primarily given the decrease in the number of rooms following hotel divestures and lease renegotiations, although we incorporate our expectation of stabilizing European economic conditions and a slight increase in revenue per available room; A fairly stable adjusted EBITDA margin in 2014, with a slim improvement in 2015 to about 26%, owing to the proposed cost efficiency plans, though we acknowledge a smooth execution is challenging; and A ratio of capital expenditures to sales pushed to about 15% in 2014 with a minor decline in 2015, given NH's investment program. Based on these assumptions, we arrive at the following credit measures: An adjusted ratio of debt to EBITDA of about 12.0x in 2014, reducing to about 11.5x in If we exclude the operating lease adjustment, the ratio remains deep in the "highly leveraged" category at about 8.0x in 2014 and 7.0x in 2015; Adjusted EBITDA interest coverage sitting comfortably between 1.0x and 1.5x over the next two years; and Adjusted funds from operations to debt of about 4% in the aforementioned DECEMBER 11,

4 period. Liquidity We assess NH's liquidity as "adequate" under our criteria. Our assessment of the company's liquidity position is supported by: Our projection that NH's source of liquidity, including cash and projected cash flow, will exceed its uses by 1.2x or more over the next 12 months; Our forecast that net sources of cash will remain positive, even if EBITDA declines by 15% from our base-case operating scenario in the coming year; Our view that in the case of a large unexpected event, NH will have some flexibility to cut capital expenditures to preserve liquidity; Our projection of adequate headroom (that is, more than 15%) under maintenance financial covenants on a 67 million revolving credit facility (RCF), which is part of the 200 million senior term loan. The calculation of the covenants under the RCF differs from our adjusted calculation; and No major short-term maturities, material debt amortization requirements, or changes to covenants in the term loan until Our assessment of NH's liquidity sources in the next 12 months includes: Our understanding that NH has access to a cash balance of about 130 million after the refinancing, while maintaining the undrawn 67 million RCF; Our projection of operating cash flow generation of about 60 million in 2013 and 2014; and Our projection that liquidity sources will adequately cover our estimate of net investment of about 100 million- 200 million in 2014 (only about 50 million is nonflexible). Outlook The stable outlook reflects our view that NH will contain its leverage so as to keep senior adjusted interest coverage at 1.0x-1.5x, preserve sufficient liquidity for its operating needs, and maintain adequate headroom under its covenants. In particular, we anticipate that NH's profitability on a recurring basis will improve in 2013, thanks to better economic conditions, with some further growth in 2014 and 2015 as the company implements its stated strategy. Upside scenario We could take a positive rating action if NH's profitability in 2014 and 2015 improves at a faster rate than we assume in our base-case scenario, leading to EBITDA interest coverage that is comfortably and consistently above 2.0x. In addition, a positive rating action would depend on the company's sustaining a resilient operating performance, steadily increasing its profit (despite a small decline in size), and maintaining its current financial policy and DECEMBER 11,

5 "adequate" liquidity. That said, we do not assume such a development in our base case for the coming 12 months. Downside scenario Rating downside could arise if adverse operating developments, a subsequent decline in profitability, or shortfalls in the company's asset disposal plan cause NH's credit metrics to deteriorate beyond our expectations. In addition, the rating could come under pressure if NH's headroom under its covenants were to deteriorate from the current levels or if NH's adjusted EBITDA interest coverage declines to less than 1.0x. That said, we do not foresee such a scenario evolving in the next 12 months. Ratings Score Snapshot Corporate Credit Rating: B-/Stable/-- Business risk: Weak Country risk: Intermediate Industry risk: Intermediate Competitive position: Weak Financial risk: Highly Leveraged Cash flow/leverage: Highly Leveraged Anchor: b- Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Fair (no impact) Comparable rating analysis: Neutral (no impact) Recovery Analysis Key analytical factors The issue rating on the senior secured notes is 'B' with a recovery rating of '2'. We think that there would be significant value remaining in the company at the point of default, that noteholders have a secured claim (along with the senior secured credit facility) over tangible hotel assets, and that the company has a comprehensive guarantor group. However, in our view the security package is weakened by the ability in the documentation for collateral to be released, as long as the loan-to-value ratio remains below 55%. While we see potential additional value from the guarantor group, we believe that lenders would rely on their claim of the collateral. DECEMBER 11,

6 We cap the recovery rating at '2' as NH is headquartered in Spain, where the insolvency regime is relatively unfavorable for secured creditors, in our view. That said, more than 60% of the companies providing collateral for the notes are domiciled in insolvency regimes that we consider more favorable, such as The Netherlands and Belgium. In our hypothetical default scenario, we assume a payment default by NH in 2015, due to a sustained decline in average revenue per room as a result of a weak economy, alongside sizable capital investment, which is not mitigated by substantial asset sales. We value the company as a going concern. We see the collateral package provided to secured lenders as the primary source of recovery, where we see value of about 390 million remaining at the point of default. This includes our assumption that the assets in the collateral pool would have reduced by the point of default. Simulated default assumptions Year of default: 2015 Jurisdiction: Spain Simplified waterfall Net value available to senior secured creditors: 730 million Priority claims: 8 million Secured debt claims: 445 million* --Recovery expectation: 70%-90% *All debt amounts include six months of prepetition interest and a 100% drawing on the group's revolving credit facility. We cap the recovery rating at '2' given our view of the Spanish insolvency regime. Related Criteria And Research Corporate Methodology, Nov. 19, 2013 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List New Rating NH Hoteles S.A. Corporate Credit Rating B-/Stable/-- Senior Secured EUR250 mil 6.875% notes due 11/15/2019 B Recovery Rating 2 DECEMBER 11,

7 Additional Contact: Industrial Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) DECEMBER 11,

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