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Fitch Revises NH Hotel Outlook to Positive; Affirms IDR at 'B'
March 24, 2017 / 12:35 PM / 8 months ago

Fitch Revises NH Hotel Outlook to Positive; Affirms IDR at 'B'

(The following statement was released by the rating agency) LONDON, March 24 (Fitch) Fitch Ratings has revised NH Hotel Group S.A's. (NH) Outlook to Positive from Stable, while affirming its Long-Term Issuer Default Rating (IDR) at 'B'. Fitch has also affirmed NH's 2019 and 2023 senior secured notes at 'BB-' with a Recovery Rating 'RR2.' The planned EUR115 million 2023 bond tap issue is neutral to future bond recovery expectations. The change in the outlook to Positive reflects the company's stronger-than-expected financial performance in 2016 and our expectation of a continued improvement into 2018 in most markets. NH's performance has also been enhanced by the heavy capex programme launched between 2014 and 2016 to upgrade and segment the hotel portfolio to remain competitive. The announced increase of its EUR285 million 2023 bonds issued in September 2016 by way of a planned EUR115 million tap issue, and debt prepayment from excess cash also shows the commitment to maintain a more robust capital structure and financial flexibility consistent with a higher rating over the next 12 to 18 months, provided NH maintains a comfortable liquidity cushion. KEY RATING DRIVERS Enhanced Financial Flexibility: The proposed EUR115 million 2023 senior secured tap issue will partly repay existing higher coupon 6.875% bonds due 2019. This will not only reduce the group annual interest costs by around 15% annually but will also extend the debt maturity profile to an average 4.9 years resulting in greater financial flexibility. NH will also use EUR50 million of cash to further repay the 2019 bonds to EUR100 million (from EUR250 million originally), further reducing gross leverage and negative interest carry costs. Satisfactory Liquidity: The planned 2023 bond tap issue and debt prepayment enhances the group's financial flexibility for an asset-heavy hotel group that remains exposed to performance volatility in a downturn. A revolving credit facility reinforces the group's liquidity profile as it is also available to repay EUR250 million in convertible bonds in 2018 should investors not convert their holdings. This mitigates any medium-term refinancing risks. Solid Operational Performance: The improving performance should be maintained in 2017 as refurbishments allow increases in average room rates (ADR). NH's 2016 results showed an EBITDA margin increase, as revenue per available room (RevPar) on a like-for-like (LfL) plus refurbishment basis rose (2016 up 5.8% yoy, 2015 up 10.3%). ADR increases (2016 prices up 4.6%, 2015 up 9.9%) were well above those derived from increased occupancy (2016 up 0.8%, 2015 up 0.3%), confirming the move away from lower-margin tour operator bookings. Refinancing Improves Capital Structure: The EUR285m 2023 notes issued in September 2016 extended and simplified the debt maturity profile of the group, as reflected in the current 'B' IDR. With the refinancing complete, the group has a simpler capital structure primarily comprising senior secured bonds, a senior secured RCF facility and a convertible bond issue. This will be enhanced by the tap issue which will replace 2019 bonds with additional 2023 bond maturities. There is also the possibility of a continuous debt amortisation profile, as the new 2023 bonds can be repaid by up to 10% annually. The anticipated disposal of the NH Jolly Madison Towers Hotel in New York should mean a further reduction in outstanding debt according to management. Improving Leverage: Leverage is compatible with levels in the single 'B' category and we expect some deleveraging from 2016. Fitch FFO lease-adjusted net leverage fell to 6.8x by end-2016 and we expect it will continue falling to 6.2x by end-2018. This remains high compared with 'BBB' category rated peers such as Accor and Whitbread, which admittedly have slightly different asset ownership mixes. The high capex of recent years should, however, decline and allow free cash flow (FCF) to turn positive from 2017. This drives our expectation of manageable, if not further improving, ability to refinance debt. Potential additional asset disposals and an encumbered asset base estimated at EUR575 million also mitigate refinancing risk. Measures to Reduce Cost Base: NH will further reduce its annual cost base by around EUR7 million-EUR8 million in 2017 and EUR10 million in 2018 as it rationalises head office functions, consolidates business units and outsources activities such as cleaning and banqueting. NH will also continue its optimisation of its lease profile in 2017. Although the group does not expect any significant reduction in lease amounts, renegotiations with landlords are focused on ensuring owners commit to refurbishment and development capex on the hotel properties. This should ensure improving EBITDA from these hotels after renewed lease liabilities. Shareholder Dispute: In June 2016 the board of NH removed four board representatives from major shareholder (29.5%) Chinese group HNA, citing possible conflicts of interest due to HNA's acquisition of competitor Carlson Hotels Inc. HNA has now sued NH and is asking for the suspension of these resolutions; the Spanish Court has recently rejected the interim measure requested by HNA. We have not factored into our rating any risk of adverse consequences on NH's strategy from this dispute but will treat it as an event risk if we feel it would impact management effectiveness or if future strategic decisions turn detrimental to financial creditors. DERIVATION SUMMARY NH is moderately positioned against major European peers such as Melia Hotels International and Accor SA (BBB-/Stable). NH focuses on urban cities and business travellers, while Accor and Melia are more diversified across leisure and business customers. Accor has more hotel brands across the hotel spectrum but NH has been diversifying upscale with its NH Collection brand, which will make up 20% of rooms. NH's FFO lease adjusted net leverage at an estimated 6.8x (adjusted for variable leases) at end-2016 is higher than its peers due to its large exposure to fixed and variable leases. In this respect NH remains a more asset-heavy hotel group than peers although the use of management contracts has increased and now represents around 15% of the total hotel portfolio. NH nevertheless owns a material proportion of its hotel assets which could provide some flexibility in a downturn. No country-ceiling, parent/subsidiary or operating environment aspects impacts the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - We estimate occupancy and ADR growth lower than management's forecasts from 2017 onwards. Under the rating case RevPar increases but more slowly than management's forecast (3.8% versus 4%-6%) despite the completion of the repositioning plan, greater number of NH Collection rooms and improved yield management. -Cost savings will be constrained by rising wages as economic conditions improve in the eurozone. -Operating lease costs around 21%-22% of sales. -Capex is modelled in line with management projections reflecting the fact that 100% of repositioning capex has been completed by 2017. -Refinancing of 2018 convertible is assumed (ie not converted into shares). -Dividend payments start in 2017. -Deferred payment for Hoteles Royal of EUR23 million in 2017. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - Improved trading performance leading to group EBITDA margin (excluding one-off gains) of 12% or above on a sustained basis. - FFO lease-adjusted net leverage below 6.5x on a sustained basis (2016: 6.8x). - EBITDAR/(gross interest +rent) or FFO fixed charge cover consistently above 1.5x (2016: both 1.4x) - Sustained positive FCF (post dividends) - Improved liquidity score reflecting limited refinancing risks ahead of the EUR250 million convertible bond maturity by October 2018 Future Developments That May, Individually or Collectively, Lead to Negative Rating Action including Stabilisation of the Outlook: - Weakening trading performance leading to group EBITDA margin (excluding one-off gains) trending toward 10% or below on a sustained basis. - FFO lease-adjusted net leverage above 7.0x on a sustained basis - EBITDAR/(gross interest +rent) or FFO fixed charge cover below 1.3x - Evidence of continuing moderately negative FCF (post dividends) LIQUIDITY Enhanced Profile: With the signing of the EUR250 million RCF in September 2016, NH has significantly enhanced its liquidity profile, allowing this asset-heavy group some reasonable operational and financial flexibility. The new RCF remained undrawn at FYE16 and provides a healthy liquidity buffer. The EUR285 million 2023 bond has simplified the capital structure with the repayment of syndicated club deals, some mortgages and other loans in the operating subsidiaries. The new tap issue on the existing EUR285 million 2023 bond demonstrated NH's proactive financial management for lowering interest costs and further deleveraging by repaying part of the higher coupon EUR250 million 6.875% bond. Contact: Principal Analyst Maggie Cheng, CFA Associate Director +44 203 530 1689 Supervisory Analyst Jean-Pierre Husband Director +44 203 530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 203 530 1021 SUMMARY OF FINANCIAL ADJUSTMENTS -Leases: Fitch has adjusted the debt by adding 8x of yearly operating lease expense related to long-term assets (EUR2,262 million in 2016) -Fitch has adjusted the calculation for variable leases in its lease-adjusted FFO fixed charge cover and FFO adjusted net leverage metrics by deducting 25% from the total annual lease commitments. -Cash: We have adjusted available cash at end-December 2016 to reflect a minimum operating cash requirement of EUR35 million on a continuing basis. 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