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Fitch Affirms Whitbread at 'BBB'; Outlook Stable
August 31, 2017 / 4:37 PM / 19 days ago

Fitch Affirms Whitbread at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, August 31 (Fitch) Fitch Ratings has affirmed Whitbread Plc's Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook and Short-Term IDR at 'F2.' Fitch has also affirmed the senior unsecured rating for Whitbread Group Plc at 'BBB'. Whitbread Group Plc is the main entity that issues debt within the group. All bonds have guarantees from Whitbread Plc and main subsidiaries Premier Inn and Costa Limited. The company's 'BBB' rating reflects Whitbread's leading market position in the UK mid-scale budget hotel segment, where it is targeting 85,000 rooms by 2021 through its Premier Inn (PI) brand, and a growing Costa Coffee shop network both in the UK and internationally. The affirmation reflects Fitch's expectation that the company's operating performance will continue to remain positive in the financial year to February 2018 (FY18), despite the challenging UK economic environment, higher operating costs and still high capex. Fitch expects Whitbread's credit metrics to remain steady despite the group's expansion strategy and moderate dividend, leading to our projection of average mid-single-digit negative free cash flow (FCF) margin over the rating horizon that we expect will be funded partly by sale- and-leaseback transactions and debt. KEY RATING DRIVERS Leading UK Hospitality Business: The rating reflects Whitbread's leading position in the less cyclical budget segment of the UK hospitality sector, with its Premier Inn brand. About 75% of the group's operating profit is generated by PI in hotels and restaurants, and 25% by the cash-generative Costa Coffee. Whitbread benefits from a well-invested estate and business customers choosing less expensive hotels. PI enjoys very high direct bookings of 94% and consistently higher occupancy rates (FY17: 80.2%) than the UK hospitality market and its European hotel peers. The rating is however constrained by Whitbread's lack of geographical diversification outside the UK, while the Brexit impact on Whitbread's businesses remains uncertain at this stage. We currently expect increased staffing costs while a protracted period of sterling depreciation could drive further inbound tourism into the UK and increased domestic demand. Selective Expansion Funded by Disposals: Fitch views positively the group's initiatives in funding capex by asset disposals instead of debt since last year. Whitbread plans to sell around GBP150 million for FY18 and Fitch estimates that a portion of gross capex would be funded by further sale-and-leaseback transactions. The group is also withdrawing PI from India and south-east Asian markets to concentrate on expansion in Germany and its JV in the Middle East. Strong Freehold Ownership: PI will remain a majority freehold business which gives the group flexibility to reduce debt and to fund expansion. This is in spite of the planned selective sale-and leaseback transactions. Whitbread's substantial unencumbered property asset base (FY17: GBP3.8-4.7 billion estimated market value, net of GBP0.4billion secured in favour of the pension scheme) continues to support its ratings. Flexibility to Restore Credit Metrics: Management has the flexibility to reduce capex and investments in both PI and Costa through additional sale-and-leasebacks or by pursuing a more conservative dividend policy, should its development programme or weaker trading performance push leverage too close to our negative rating sensitivities. Whitbread has reaffirmed its commitment to its investment-grade rating with an internal leverage target of adjusted net debt/EBITDAR ratio below 3.5x (FY17: 3.2x). Expected Slight Leverage Increases: Whitbread's credit metrics have been resilient through the cycle thanks to a sustained improvement in operating indicators driven by PI's leading market position and the growth at Costa. The group has limited headroom for the current ratings, but Fitch expects only moderate pressure on Whitbread's credit metrics with FFO adjusted net leverage at 3.5x-3.7x in FY18-FY20, due to high expansionary capex, temporary lower profitability for Costa and increased operating leases. Negative FCF: Fitch expects that Whitbread's FCF will remain negative until at least FY20 due to higher capex (average GBP685 million pa over the next three years). This is not a major rating constraint given our expectation of steady operating performance, so long as Whitbread maintains a conservative funding structure. DERIVATION SUMMARY Whitbread's IDR of 'BBB' is positioned in between Marriott International Plc (BBB/Positive) and Accor (BBB-/Rating Watch Evolving). Unlike the pure asset-light model of Marriott and Accor (after the recent separation of HotelInvest), Whitbread has a well-invested estate, holding to the freehold to 64% of its hotels and benefits from a stable contribution from Costa (25% of operating profit). However, it has less geographic and segment diversification than Marriott. Whitbread is much more resilient than Melia and NH Hotel (B/Positive), thanks to PI's leading position in the supportive UK hotel market and PI's less cyclical budget hotel segment with a much higher occupancy rate of 80% last year than Melia and NH at around 68%. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating-case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Fitch's key assumptions within the rating case for Whitbread include: PI's segment revenue growth driven by room expansion, more expensive room rates in London and conservative LfL growth ; - PI's expansionary growth in rooms of around 5% p.a. (the UK and international) in FY18-FY21; - Costa's segment revenue growth driven by store expansion, coffee machine expansion (the UK and international) and more modest LfL growth than the past three years; - rents of around GBP300 million in FY18; - lower operating margin for PI of 20bp in FY18; - lower operating margin of Costa 120bp in FY18 per management guidance; - gross capex of GBP700 million in FY18 and average of close to 20% of sales thereafter; - net divestments of around GBP150 million in FY18 as guided by the management, and Fitch's estimation of around GBP100 million in FY19; - cash pension contributions of GBP88 million in FY16, GBP92 million pa for FY18-FY20. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Material geographic and product diversification and/or scale of business, along with continuing improvement in trading leading to an EBIT margin sustainably above 20% (FY17: 18.8%) - Lease-adjusted EBITDAR/interest plus rents ratio above 4x (FY17: 3.6x) or FFO fixed charge cover above 3.5x (FY17: 3.0x) - Fitch FFO adjusted net leverage (variable lease adjusted) below 3.0x (FY17: 3.3x) - Sustained positive FCF Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Deterioration in core businesses or rapid expansion leading to EBIT margin sustainably below 15% - Lease-adjusted EBITDAR/interest plus rents ratio to below 3x or FFO fixed charge cover below 2.5x on a sustained basis - Significantly rising leverage, with Fitch FFO adjusted net leverage (variable lease adjusted) increasing towards 4.0x on a sustained basis LIQUIDITY Adequate Liquidity: Headroom remains adequate but relies heavily on the new GBP950 million revolving credit facility due September 2022. At FYE17 the group had GBP847 million of liquidity, comprising GBP53 million available cash and GBP880 million undrawn under the facility (FYE16: GBP800 million undrawn). Whitbread issued a 10-year GBP200 million US private placement of loan notes in pounds sterling at around 2.6% in March 2017 which demonstrates the group's continuing access to the debt market to refinance maturing debt. FULL LIST OF RATING ACTIONS Whitbread PLC -- Long-Term IDR: affirmed at 'BBB'/Stable; --- Short-Term IDR: affirmed at 'F2'. Whitbread Group PLC -- Senior unsecured rating: affirmed at 'BBB' Contact: Principal Analyst Maggie Cheng, CFA Associate Director +44 203 530 1698 Supervisory Analyst Sophie Coutaux Senior Director +33 1 44 29 91 32 Fitch France S.A.S 60 rue de Monceau 75008 Paris Committee Chair Pablo Mazzini Senior Director +44 203 530 1021 SUMMARY OF FINANCIAL STATEMENTS ADJUSTMENTS -Leases: Fitch adjusts debt amount by adding 7.9x of yearly operating lease expense, including an adjustment for contingent rents in its forecasts (where we apply a haircut of 25%) to reflect the inherent flexibility of these lease arrangements. -Cash: Fitch adjusts available cash at FYE17 by deducting GBP10 million for working-capital requirements. - Fair Value of Debt: Fitch adjusts total financial by deducting GBP53 million for hedging of US private placements to sterling. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. 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