nh hotel credit update 11 10 16 jph...2016/11/10 · 11 october 2016 gaming, lodging & leisure...
TRANSCRIPT
Corporates
www.fitchratings.com 11 October 2016
Gaming, Lodging & Leisure / Spain
NH Hotel Group S.A. Update
Key Rating Drivers
Enhanced Liquidity and Performance: Fitch upgraded the ratings of NH Hotel Group S.A. in
September, reflecting the improved liquidity and better structural and cyclical performance in
2016. The new three year (with an option of a two-year extension) EUR250m RCF, together
with the EUR285m 2023 senior secured notes, have reinforced the group's liquidity profile, by
repaying the outstanding syndicated credit, mortgage club loans, and other bilateral facilities
including short term credit facilities and a subordinated loan. This will improve financial
flexibility for an asset-heavy hotel group that remains exposed to performance volatility in a
downturn. The new RCF will also be available to repay the EUR250m convertible bonds in
2018 should they not convert at that time.
Operating Performance Improving: The improving performance should be maintained in
2016 as refurbishments allow increases in average room rates (ADR). 1H16 results showed an
EBITDA margin increase, as revenue per available room (RevPar) on a lfl plus refurbishment
basis rose (1H16 up 5.8% yoy, 2015 up 10.3%). Encouragingly, ADR increases (1H16 prices
up 4.0%, 2015 up 9.9%) were well above those derived from increased occupancy (1H16 up
1.7%, 2015 up 0.3%), confirming the move away from lower-margin tour operator bookings.
Refinancing Improves Capital Structure: The EUR285m 2023 senior secured notes will both
extend and simplify the debt maturity profile of the group. 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. The EUR285m 2023 senior secured notes
will also both extend and simplify the debt maturity profile.
Improving Leverage: Leverage is compatible with levels in the 'B' category and we expect
some deleveraging in 2016. We expect Fitch FFO lease-adjusted net leverage to fall to around
7.1x by end-2016 and 6.6x by end-2017, although this remains high compared with 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 in 2017. This is despite the group's plan to start paying a dividend from 2017 onwards,
which will limit the scope for deleveraging.
Shareholder Dispute: In June 2016 the board of NH voted off 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, but a Spanish Court has recently ruled that the interim
measure requested by HNA has been rejected. 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.
Rating Sensitivities
Continued Improving Business Profile: Sustained improvement in trading leading to group
EBITDA margin (excluding capital gains) at or above 12%, together with EBITDAR/gross
interest + rents above 1.8x, FFO lease-adjusted net leverage below 6.5x and a demonstrable
path to sustained positive FCFs would be positive for the ratings.
Liquidity and Debt Structure
Improved Liquidity: With the signing of the EUR250m RCF facility, NH will have significantly
enhanced its liquidity profile, allowing this asset heavy group reasonable operational and
financial flexibility.
Related Research
European Non-food Retail, Lodging, Restaurant Speculative-Grade Handbook (February 2016)
What Investors Want to Know: EMEA Hotels (November 2015)
2016 Outlook: Global Hotels (Still Constructive on Cycle, But Cognizant of Overstaying) (December 2015)
Analysts
Jean-Pierre Husband +44 203 530 1155 [email protected] Maggie Cheng +44 203 530 1689 [email protected]
Ratings
Long-Term IDR B Secured BB-/RR2
Outlooks Foreign-Currency Long-Term IDR Stable
Financial Data
NH Hotel Group S.A.
31 Dec 15
31 Dec 14
Revenue (EURm) 1,377 1,246 Operating EBITDA (EURm)
125 89
Operating EBITDA margin (%)
9.1 7.2
Total adjusted debt with equity credit
3,163 2,996
Operating EBITDAR/ gross interest expense + rents (x)
1.1 1.1
FFO adjusted net leverage
7.7 7.9
Corporates
NH Hotel Group S.A.
October 2016 2
Immediate Peer Group – Comparative Analysis
Sector Characteristics Operating Risks
The hospitality sector is cyclical and depends on the overall economic environment, tourism,
and business and leisure travel. Variability of operating profit depends on market positioning
(budget, mid-market or upper-end segments) – the more upper-end, the more volatile. Branded
upmarket chains are gaining market share at the expense of independent operators. Hotel
operators are developing specific asset-management strategies (from fully owned operations to
fixed, variable leases, franchise and management contracts) to adjust their business models
and maximise profit.
Financial Risks
Due to significant fixed costs, operating profit is very sensitive to changes in revenue per
available room. Fitch adjusts debt by capitalising operating leases and comparing credit profiles
by looking at debt and interest coverage ratios.
Peer Group Analysis 9FY15 Figures NH Hotel Marriott Whitbread AccorHotel
B/Stable BBB/Positive BBB/Stable BBB-/Stable
Revenue (EURm) 1,377 3,142a 3,681 5,581 EBITDAR 408 2,113 1,205 1,781 EBITDAR margin (%) 29.6 67.3 32.8 32.2 Lease-adjusted net debt/EBITDAR (x) 7.7 n.a. 2.9 3.9 FFO lease-adjusted net leverage (x) 7.7 3.0 3.4 4.0 a Excludes cost reimbursements incurred on behalf of managed and franchised hotels
Source: Fitch, companies
Key Credit Characteristics
When assessing qualitative factors, Fitch looks at RevPar and like-for-like sales, as well as
market positioning, size and geographical diversification. The agency also reviews asset-
management strategies, as well as freehold and leasehold property values. On credit metrics,
Fitch assesses off-balance-sheet obligations and FCF capacity.
Overview of Companies
AccorHotels (BBB−/Stable) – is the European leader in hotels and a major global hotel
company. Main brands include Sofitel, Novotel, Mercure and Ibis. At end-2015, the
consolidated hotel base totalled more than 510,000 rooms (up from 480,000 rooms in 2014), of
which 53% were mid- or upscale and 47% economy or budget hotels. Leverage is relatively
high but stable for the rating. The Fairmont Hotels acquisition improved its geographical and
upscale hotel presence, but is neutral in financial terms as it is largely share-funded. The group
is considering selling part of its HotelInvest business to third parties.
Marriott International, Inc. (BBB/Positive) – Fitch revised the Outlook from Stable to Positive
in November 2015 as it expects the acquisition of Starwood Hotels & Resorts to lower
Marriott’s business risk profile and improve profitability, which should enhance its ability to
navigate cyclical downturns. The combined company will have the largest high-quality,
internationally recognised brand portfolio in the industry (30 brands).
Whitbread PLC (BBB/Stable) – is the UK’s leading hospitality company in the less cyclical
budget segment, with its Premier Inn brand. It benefits from a well-invested estate and
business customers choosing less expensive hotels. About 78% of operating profit is generated
by hotels and restaurants (Beefeater, Table Table and Brewers Fayre), and 22% by Costa
Coffee. The coffee chain is expanding rapidly, with fully owned shops and franchises involving
capital outlay. However, the rating reflects a lack of geographical diversification.
Peer Group Issuer Country
BBB Marriott International, Inc.
United States
Whitbread PLC United Kingdom BBB- AccorHotels France B NH Hotel Group S.A.
Spain
Issuer Rating History
Date LT IDR (FC)
Outlook/ Watch
30 Sep 16 B Stable 20 Apr 16 B- Positive 26 Feb 16 B- Stable 29 Apr 15 B- Stable 28 Nov 14 B- Stable 19 Dec 13 B- Stable 28 Oct 13 B- Stable
Snapshot Profile: Major Issuer-Specific Rating Factors and Trends
Rating factor Statusa Trend
Operations Average Improving Market position Weak Improving Finances Weak Improving Governance Average Neutral Geography Average Improving a Relative to peer group
Source: Fitch
Related Criteria
Criteria for Rating Non-Financial Corporates (September 2016)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (April 2016)
Country-Specific Treatment of Recovery Ratings (April 2016)
Corporates
NH Hotel Group S.A.
October 2016 3
Debt Maturities and Liquidity (Pro-forma After Refinancing in September 2016)
Debt maturities (EURm)
2016 12 2017 32 2018 259 2019 254 After 2019 3337 Cash and equivalents 51
Undrawn committed facilities 310 Facility A EUR250m due September 19 with an option for a 2-year extension
250
Bilateral credit facilities 60
Source: Fitch
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2012 2013 2014 2015 2016F 2017F
Leverageincluding Fitch expectations
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2012 2013 2014 2015 2016F 2017F
Interest Coverincluding Fitch expectations
-6%-4%-2%0%2%4%6%8%
10%12%
2012 2013 2014 2015 2016F 2017F
Revenue Growthincluding Fitch expectations
-5%
0%
5%
10%
15%
20%
2012 2013 2014 2015 2016F 2017F
FFO Profitabilityincluding Fitch expectations
Fixed lease44%
Mgt. contracts
24%
Owned22%
Variable lease10%
NH Hotel Portfolio by Ownership Structure(No. of rooms in 2015)
0
50
100
150
200
2012 2013 2014 2015
NH Hotel Group SACapex (EURm) from 2012 to 2015 included
Source: Company
13%
39%33%
15%
24%
47%
19%
10%
Spain Germany/Benelux/C.Europe Italy Latam
FY15 Segmental SpliOuter ring: RevenueInner ring: EBITDA
NH Hotel Group S.A.———— Gaming, Lodging & Leisure Median ———— Developed B Cat Median ———— Source: Company data; Fitch
0% 25% 50% 75% 100%
5 Oct 15
5 Oct 16
Distribution of Sector Outlooks
Directional Outlooks and Rating
Watches
Negative Stable Positive
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. Key Fitch forecast
assumptions include:
• 2016 and 2017 RevPar increases
more moderate than in 2015;
• cost increases to be partly offset by
rising salaries in Spain and Italy;
• operating lease costs from 2016 to
2018 of betweenEUR299m and
EUR334m p.a.;
• dividends restarted at a modest level
from 2017.
Definitions
• Leverage: Gross debt plus lease
adjustment minus equity credit for
hybrid instruments plus preferred
stock divided by FFO plus gross
interest paid minus interest received
plus preferred dividends plus rental
expense.
• Interest cover: FFO plus gross
interest paid minus interest received
plus preferred dividends divided by
gross interest paid plus preferred
dividends.
• FFO profitability: FFO divided by
revenue.
• For further discussion of the
interpretation of the tables and
graphs in this report see Fitch’s
“Interpreting the New EMEA and Asia-
Pacific Corporates Credit Update Format”
Special Report, dated 25 November
2009 and available at
www.fitchratings.com.
Corporates
NH Hotel Group S.A.
October 2016 4
Corporates
NH Hotel Group S.A.
October 2016 5
Key Debt Instruments
Summary
Issuer, amount, maturity ISIN Rating Ranking Summary of terms
EUR285m senior secured notes 2023
XS1497527736 BB-/RR2 Senior 7 years bullet, fixed-rate coupon, first lien secured, rank pari- passu with all other senior secured debt, no maintenance covenants
EUR250m senior secured notes 2019
XS50954676283 BB-/RR2 Senior 6 years bullet, fixed-rate coupon, first lien secured, rank pari- passu with all other senior secured debt, no maintenance covenants
EUR250m unsecured convertible notes 2018
XS0989390249 n.r. Subordinated n.a.
The information above is intended as summary information only. It is not intended to and cannot be a substitute for detailed analysis of the bond documents and consultation with legal counsel Source: Fitch
Corporates
NH Hotel Group S.A.
October 2016 6
* EBITDA/R after Dividends to Associates and Minorities
b This has been adjusted by deducting 25% variable leases from the group rent total
c For our FFO adjusted net leverage (including variable lease adjustment), we have used a total adjusted debt with equity
credit 3,092,150 (EUR 000) How to interpret the forecast presented The forecast presented is based on the agency’s internally produced, conservative rating case forecast. It does not represent the forecast of the rated issuer. The forecast set out above is only one component used by Fitch to assign a rating or determine a rating outlook, and the information in the forecast reflects material but not exhaustive elements of Fitch’s rating assumptions for the issuer’s financial performance. As such, it cannot be used to establish a rating, and it should not be relied on for that purpose. Fitch’s forecasts are constructed using a proprietary internal forecasting tool, which employs Fitch’s own assumptions on operating and financial performance that may not reflect the assumptions that you would make. Fitch’s own definitions of financial terms such as EBITDA, debt or free cash flow may differ from your own such definitions. Fitch may be granted access, from time to time, to confidential information on certain elements of the issuer’s forward planning. Certain elements of such information may be omitted from this forecast, even where they are included in Fitch’s own internal deliberations, where Fitch, at its sole discretion, considers the data may be potentially sensitive in a commercial, legal or regulatory context. The forecast (as with the entirety of this report) is produced strictly subject to the disclaimers set out at the end of this report. Fitch may update the forecast in future reports but assumes no responsibility to do so.
Corporates
NH Hotel Group S.A.
October 2016 7
Source: Fitch
Corporates
NH Hotel Group S.A.
October 2016 8
Corporates Ratings NavigatorLodging
aaa AAA Stable
aa+ AA+ Stable
aa AA Stable
aa- AA- Stable
a+ A+ Stable
a A Stable
a- A- Stable
bbb+ BBB+ Stable
bbb BBB Stable
bbb- BBB- Stable
bb+ BB+ Stable
bb BB Stable
bb- BB- Stable
b+ B+ Stable
b B Stable
b- B- Stable
ccc CCC Stable
cc CC Stable
c C Stable
d or rd D or RD Stable
Issuer Default
Rating
Factor
Levels
Sector Risk
Profile
Operating
EnvironmentFinancial
Flexibility
Financial
StructureProfitability
Property
CharacteristicsBrandingDiversification
Market
Position/Scale
Management
and Corporate
Governance
Business Profile Financial Profile
NH Hotel Group S.A.
Corporates
NH Hotel Group S.A.
October 2016 9
Corporates
NH Hotel Group S.A.
October 2016 10
Reconciliation of Key Financial Metrics for NH Hotel Group S.A.
(EUR Thousand) 31 Dec 2015
Income Statement Summary
Operating EBITDA 125,015
+ Recurring Dividends Paid to Non-controlling Interest 0
+ Recurring Dividends Received from Associates 0
+ Additional Analyst Adjustment for Recurring I/S Minorities and Associates 0
= Operating EBITDA After Associates and Minorities (k) 125,015
+ Operating Lease Expense Treated as Capitalised (h) 282,597
= Operating EBITDAR after Associates and Minorities (j) 407,612
Debt & Cash Summary
Total Debt with Equity Credit (l) 902,333
+ Lease-Equivalent Debt (Operating Lease Expense Treated as Capitalised * Capitalised Lease Multiple) (h*i) 2,260,776
+ Other Off-Balance-Sheet Debt 0
= Total Adjusted Debt with Equity Credit (a) 3,163,109
Readily Available Cash [Fitch-Defined] 42,699
+ Readily Available Marketable Securities [Fitch-Defined] 0
= Readily Available Cash & Equivalents (o) 42,699
Total Adjusted Net Debt (b) 3,120,410
Cash-Flow Summary
Preferred Dividends (Paid) ( f) 0
Interest Received 4,806
+ Interest (Paid) (d) -56,750
= Net Finance Charge (e) -51,944
Funds From Operations [FFO] ( c) 69,406
+ Change in Working Capital [Fitch-Defined] -8,386
= Cash Flow from Operations [CFO] (n) 61,020
Capital Expenditures (m) -176,083
Multiple applied to Capitalised Leases (i) 8.0
Gross Leverage
Total Adjusted Debt / Op. EBITDAR* [x] (a/j) 7.8
FFO Adjusted Gross Leverage [x] 7.8
Total Adjusted Debt/(FFO - Net Finance Charge + Capitalised leases - Pref. Div Paid) (a/(c-e+g-f))
Total Debt With Equity Credit / Op. EBITDA* [x] (l/k) 7.2
Net Leverage
Total Adjusted Net Debt / Op. EBITDAR* [x] (b/j) 7.7
FFO Adjusted Net Leverage [x] 7.7
Total Adjusted Net Debt/(FFO - Net Finance Charge + Capitalised leases - Pref. Div Paid) (b/(c-e+g-f))
Total Net Debt / (CFO - Capex) [x] ((l-o)/(n+m)) -7.5
Coverage
Op. EBITDAR / (Interest Paid + Lease Expense)* [x] (j/-d+h) 1.2
Op. EBITDA / Interest Paid* [x] (k/(-d)) 2.2
FFO Fixed Charge Cover [x] 1.2
(FFO - Net Finance Charge + Capit. leases - Pref. Div Paid) / (Gross Interest Paid + Capit. leases - Pref. Div Paid) ((c-e+g-f)/(-d+g-f))
FFO Gross Interest Coverage [x] 2.1
(FFO - Net Finance Charge - Pref. Div Paid) / (Gross Interest Paid - Pref. Div Paid) ((c-e-f)/(-d-f))
*EBITDA/R after Dividends to Associates and M inorities
Source: Fitch based on company reports
Corporates
NH Hotel Group S.A.
October 2016 11
Fitch Financial Adjustments – Summary Financials
NH Hotel Group S.A.
Reported
Values
Sum of Fitch
Adjustments
Cash
Adjustment
Lease
Adjustment
Adjusted
Values
31 Dec 15
Income Statement Summary
Revenue 1,376,634 0 1,376,634
Operating EBITDAR 125,015 282,597 282,597 407,612
Operating EBITDAR after Associates and Minorities 125,015 282,597 282,597 407,612
Operating EBITDA 125,015 0 125,015
Operating EBITDA after Associates and Minorities 125,015 0 125,015
Operating EBIT 18,856 0 18,856
Debt & Cash Summary
Total Debt With Equity Credit 902,333 0 902,333
Total Adjusted Debt With Equity Creditb 902,333 2,260,776 2,260,776 3,163,109
Lease-Equivalent Debt 0 2,260,776 2,260,776 2,260,776
Other Off-Balance-Sheet Debt 0 0 0
Readily Available Cash & Equivalents 77,699 -35,000 -35,000 42,699
Not Readily Available Cash & Equivalents 0 35,000 35,000 35,000
Cash-Flow Summary
Cash Interest (Paid) LTM -56,750 0 -56,750
Funds From Operations [FFO] 69,406 0 69,406
Change in Working Capital [Fitch-Defined] -8,386 0 -8,386
Cash Flow from Operations [CFO] 61,020 0 61,020
Non-Operating/Non-Recurring Cash Flow 0 0 0
Capital (Expenditures) -176,083 0 -176,083
Common Dividends (Paid) 0 0 0
Free Cash Flow [FCF] -115,063 0 -115,063
Gross Leverage
Total Adjusted Debt / Op. EBITDAR* [x] 7.2 7.8
FFO Adjusted Leverage [x] 7.4 7.8
Total Debt With Equity Credit / Op. EBITDA* [x] 7.2 7.2
Net Leverage
Total Adjusted Net Debt / Op. EBITDAR* [x] 6.6 7.7
FFO Adjusted Net Leverage [x] 6.8 7.7
Total Net Debt / (CFO - Capex) [x] -7.2 -7.5
Coverage
Op. EBITDAR / (Interest Paid + Lease Expense)* [x] 2.2 1.2
Op. EBITDA / Interest Paid* [x] 2.2 2.2
FFO Fixed Charge Coverage [x] 2.1 1.2
FFO Interest Coverage [x] 2.1 2.1
*EBITDA/R after Dividends to Associates and M inorities
bFFO Adjusted net leverge (including variable lease adjustment) calculation, we have used a lease adjustment figure o f 2,232,516 (EUR 000)
Corporates
NH Hotel Group S.A.
October 2016 12
Issuer NH Hotel Group SA IDR B
Currency EUR
Going Concern Enterprise Value Liquidation Value
Book
Value
Advance
Rate
Available to
Creditors
Going Concern Enterprise Value 991.2 Cash 77.7 0% 0.0
EBITDA Multiple (x) 7 A/R 169.3 75% 127.0
Inventory 9.5 50% 4.8
Net PPE 1724.2 50% 862.1
Total 993.8
Enterprise Value for Claims Distribution
Greater of Going Concern Enterprise or Liquidation Value 993.8
Additional value from affiliates
Less Administrative Claims 10% 99.4
Adjusted Enterprise Value for Claims 894.4
Distribution of Value
Secured Priority Amount
Value
Recovered Recovery Recovery Notching Rating
Super Senior Facility 0.0 - - - - -
Senior Secured 823.0 823.0 100% RR1* +3 BB
Senior Secured Notes due 2019 250.0 250.0 100% RR1* +3 BB
Senior Secured Notes due 2023 285.0 285.0 100% RR1* +3 BB
Mortgage 38.0
RCF facility 250.0
Restructuring Facility
Acquisition Facility
Acquisition Facility
Capital Leases
Second Lien
Concession Payment Availability Table
Adjusted Enterprise Value for Claims 894.4
Less Secured Debt Recovery 823.0
Remaining Recovery for Unsecured Claims 71.4
Concession Allocation 0% 0.0
Value to be Distributed to Senior Unsecured Claims 71.4
* Capped at RR2 for Spanish jurisdiction
The amount of concession payments is highly dependent on circumstances, but Fitch typically
allows up to 5% of the recovery value available to senior unsecured creditors to be allocated to
concession payments. Concession payments allocated to subordinated debt should never result
in higher recoveries than those o f senior unsecured debt.
Recovery Analysis
Corporates
NH Hotel Group S.A.
October 2016 13
Considerations b+ b b– ccc Trend Fitch's View
Business Model Robust Sustainable Intact Compromised �
NH has been able to transform several
prestigious NH Collection Hotels in
Madrid and Italy and to improve the
company's segmentation and image.
Strategy /
Execution RiskLimited
Moderate execution
risk
Meaningful execution
riskHigh execution risk �
NH has been able to execute sale and
leaseback ON hotel properties, but major
refurbishment and asset rotation carry
some material risks
Cash Flow Consistently Positive Neutral to positive FCF Volatile FCFConstantly negative
FCF �
Negative FCF has been driven by high
capex in segmenting and upgrading
hotels in recent years. As the
refurbishment programme completes,
FCF should begin to turn positive.
Leverage profileClear Deleveraging
PathDeleveraging capacity High but sustainable Unsustainable �
Leverage remains high but should reduce
as operational performance improves and
capex spend reduces in the next three
years.
Governance and
financial policyCommitted
Some commitment to
deleveragingAggressive
Uncommitted / biased
towards equity
interests�
Financial policy has been consistent and
pro-active in improving creit profile
through re-negotiating fixed leases to
variable leases, creating variable leases
and management contracts for new hotel
pipeline.
Refinancing risk Limited Manageable High Excessive �The refinancing risk is now low with the
new 2023 secured notes and RCF to be
signed imminently.
Liquidity Comfortable Satisfactory Limited Poor/partly funded �
The new EUR250m three year RCF facility
will provide acceptable liquidity for the
group. In addition the group has over
EUR575m of unencumbered assets
which could offer some financial flexibility
under certain conditions.
CONCLUSION b
Corporates
NH Hotel Group S.A.
October 2016 14
The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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