Secondary Contact: Jessica Goldberg, Madrid (34) ;

Transcription

1 Research Update: DRAFT: Spain-Based NH Hotel Group 'B' Rating Affirmed On Consistenly Sound Operating Performance; Outlook Stable Primary Credit Analyst: Natalia Arrizabalaga, London ; Secondary Contact: Jessica Goldberg, Madrid (34) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Issue Ratings Related Criteria DRAFT Ratings List SEPTEMBER 27, S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings permission. See Terms of Use/Disclaimer on the

2 Research Update: DRAFT: Spain-Based NH Hotel Group 'B' Rating Affirmed On Consistenly Sound Operating Overview Spain-based NH Hotel Group S.A. (NH) continued to post strong operating and financial results during H1 2017, underwent refinancing in Q2 2017, made progress in renegotiating its lease terms leading to more flexible leasing obligations, and benefitted from improved industry and macroeconomic conditions in the company's key markets. NH's successful repositioning plan, which enabled it to increase its average daily rate and resulted in higher revenue per available room, has led us to revise our business risk assessment upward. However, we note that leverage remains high and we expect adjusted debt to EBITDA to remain significantly above 5x and funds from operations (FFO) to debt below 12% over the next two years. We are affirming our 'B' long-term corporate credit rating on NH and our 'BB-' issue ratings on the senior secured notes. The stable outlook reflects our expectation that NH will report strong profitability in full-year 2017, with a reported EBITDA margin above 14%, which will lead to adjusted debt to EBITDA of 6.0x-7.0x and FFO to debt at about 8%. Rating Action On Sept. 27, 2017, S&P Global Ratings affirmed its 'B' long-term corporate credit rating on Spain-based NH Hotel Group S.A. (NH). The outlook is stable. At the same time, we affirmed our 'BB-' issue ratings on the group's 400 million senior secured notes and 100 million equivalent senior secured notes. The recovery rating is '1', indicating our expectation of very high (90%-100%; rounded estimate: 95%) recovery prospects in the event of a payment default. Rationale The affirmations reflect our expectation that NH will continue to post strong operating performance over the next 12 months with the reported EBITDA margin increasing to above 14% as a result of favorable industry and macroeconomic conditions, particularly in Spain and the Benelux region. We have revised upward our assessment of NH's business risk profile to reflect the progress of its successful repositioning plan, which has proved the SEPTEMBER 27,

3 company's ability to increase average daily rate (ADR) and resulted in higher revenue per available room (RevPAR). An increase in reported EBITDA margins, which are now more in line with peers', has also been a supportive factor. Additionally, even though NH's portfolio is still reliant on owned or leased hotels (about 75% of total rooms), which in our opinion contributes to a high and relatively inflexible fixed-cost base and greater constraints on the group's earnings in a cyclical downturn, we appreciate that NH is moving toward a more asset-light business model. We acknowledge that the company is now focusing on growing through management contracts and has renegotiated over 100 leasing agreements in order to achieve more flexible terms, for example, by minimizing the fixed rent in unprofitable markets and introducing the variable component in the rent payment. Considering the above-mentioned improvements, together with NH's already solid brand recognition and its relatively high barriers to entry given that many of its properties are located in prime real estate markets, we think that NH has strengthened its competitive position. However, we continue to see NH's business constrained by its limited activities outside Europe (about 90% of total revenues), as well as its limited format diversification with a still significant reliance on the mid-scale hotels where NH currently has a strong position. We note that the company's strategy is to continue increasing its presence in the upper scale category, which should contribute to a higher RevPar and thus improved profitability. Moreover, we factor in some key business risks in our assessment such as the company's high level of profit volatility over the lodging cycle given the high fixed cost base of its owned hotels; the cyclical, fragmented and competitive nature of the lodging industry; and exposure to discretionary consumer spending. We also think that the growing Airbnb market could weigh on NH, although we recognize that NH's proposition is different and targets more affluent customers, often with a business profile and for a shorter average stay. The group's credit metrics have improved as a result of improved financial results, however, we still expect S&P Global Ratings-adjusted debt to EBITDA to be above 6.0x in 2017 versus 7.0x as of Dec. 31, 2016, and FFO to debt of about 8.0% versus 6.9% as of Dec. 31, We note that a large share (about 75%) of the group's adjusted debt stems from our operating-lease adjustment. In addition, NH generated negative free operating cash flows (FOCF) over the last five years and this trend is only expected to be reversed in full-year (FY) NH has publicly stated its intention to deleverage by repaying the 100 million debt maturing in 2019, as well as relying on the potential 250 million bond conversion into equity in November In our base case, we assume: GDP growth expectations in NH's main countries of operations--spain (2%-3%), Italy (about 1%), The Netherlands (about 2%), Belgium (1%-2%), and Germany (about 2%)--should support group revenue growth over the next two years. A strong outlook for the lodging industry, which NH is well positioned to benefit from. SEPTEMBER 27,

4 Revenue growth of about 4%-5% for future years with a moderate impact on the number of rooms. Growth is mainly coming from its ongoing refurbishment plans leading to higher ADR and RevPar. Reported EBITDA margin expected to grow steadily to 15% by FY2018 thanks to cost efficiency measures and refurbishment plans. Our assumption is supported by the current trend, with the EBITDA margin already increasing to 13.5% in H from 10.5% in H Capital expenditure (capex) of about 100 million in the next two years. Already paid dividends of 17 million in 2017, increasing progressively over the following years. We assume 100 million in debt repayments in 2019 (which comprises a high yield bond maturing in November 2019, callable from November 2017). We do not assume the bond conversion in November 2018, as there is still a lot of uncertainties with regards to future share price of the company (conversion price: 4.919). Based on these assumptions, we arrive at the following credit measures for NH: Adjusted debt to EBITDA of 6.0x-7.0x in 2017 and 2018, decreasing to below 6.0x in Adjusted FFO to debt of 7%-9% over the next three years. Adjusted EBITDA interest coverage improving to 2.6x by 2019 from about 2.1x in Positive FOCF of about 30 million- 40 million over the next two years. Liquidity We assess NH's liquidity position as adequate. We think that sources of cash are going to comfortably exceed the uses of cash over the next 12 months. We also expect NH to remain in compliance with the financial covenants even if the EBITDA declines by 15%. In our view, the company has generally prudent risk management, but we think that NH is unlikely to be able to absorb high-impact, low-probability events without the need for refinancing given the high leverage and volatility of the industry. We anticipate the following principal liquidity sources: Cash and equivalents of 127 million as of Aug. 31, 2017; Availability of 250 million under its newly signed revolving credit facility (RCF); Additional undrawn short-term bank lines of about 54 million; Forecast FFO of about 150 million over the next 12 months; and Additional inflow of about 5.5 million from signed asset sales (to be received in Q4 2017). We anticipate the following principal liquidity uses: Short-term debt maturities of 24 million; Seasonal working capital outflow of about 13 million; Capex of about 100 million- 110 million; About 10 million for the second disbursement under Hesperia management contract (signed); and Dividend payments of about 30 million- 40 million SEPTEMBER 27,

5 Outlook The stable outlook reflects our expectation that NH will improve its solid operating performance over the next 12 months with the reported EBITDA margin increasing to above 14%. We expect this to happen through top-line organic growth of about 4%-5% thanks to the repositioning plan implemented by the company, as well as several cost efficiency measures. Our stable outlook also reflects our view that the company will gradually reduce debt, which should continue to strengthen the group's credit metrics over the next 12 months. In our base-case forecast, we expect leverage to decline to 6.0x-7.0x, FFO to debt to increase to about 8%, and FOCF to turn positive by the end of Upside Scenario We could raise our ratings over the next 12 months if the company continues to generate strong EBITDA above our base-case projections and it continues reducing debt, such that adjusted leverage declines toward 5.0x. This could happen if the company takes measures not included in our base case to considerably deleverage. In addition, we would consider a positive rating action if NH generated meaningful positive FOCF on a sustainable basis and we had more visibility on the conversion of the 250 million convertible bond due in November Downside Scenario We could lower the ratings if NH's operating performance is materially worse than our current base case due to macroeconomic, geopolitical event risks, or competition resulting in substantial decline in RevPar performance and EBITDA margin moving below 10%. In this scenario, a significant profit decline could weaken cash flow, resulting in negative FOCF, leading to weakening liquidity, a covenant cushion below 15%, or adjusted EBITDA interest below 1.5x. We could also take a negative rating action if the group distributes dividends that are significantly higher than we currently anticipate, undertakes debt-financed acquisitions, or moves toward a considerably capital-intensive business model. Ratings Score Snapshot Corporate Credit Rating: B/Stable/-- Business risk: Fair Country risk: Intermediate Industry risk: Intermediate Competitive position: Fair Financial risk: Highly leveraged Cash flow/leverage: Highly leveraged Anchor: b SEPTEMBER 27,

6 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 ratings analysis: Neutral (no impact) Issue Ratings Recovery analysis Key analytical factors We affirmed our 'BB-' issue and '1' recovery ratings on the 400 million equivalent senior secured notes due 2023, indicating our expectations of very high recovery prospects (90%-100%; rounded estimate: 95%). We also affirmed our 'BB-' issue and '1' recovery ratings on the 100 million equivalent senior secured notes due 2018, indicating our expectations of very high recovery prospects (90%-100%; rounded estimate: 95%). The valuation of enterprise value at default includes a discreet asset valuation of the direct collateral package (drawing on the Duff & Phelps valuation of March 2017) and the unencumbered assets and residual value of pledged mortgages. In addition, an EBITDA multiple approach was attributed to the leased and managed hotels. Triggers for the hypothetical default scenario assumed in 2020 would include an unexpected economic downturn and a separate external shock to the travel and tourism market, leading to a substantial fall in visitor numbers and average revenue per room. We value NH as a going concern given its strong market positions, leading brands, and significant unencumbered assets. Simulated default assumptions Year of default: 2020 Jurisdiction: Spain Simplified waterfall Gross enterprise value at default: 1,192 million Net enterprise value after administrative costs (10%): 1,073 million Value available for senior secured claims: 764 million Senior secured debt claims: 511 million* Recovery rating: 1 (90%-100%; rounded estimate: 95%) *All debt amounts include six months of prepetition interest. RCF assumed to be 85% drawn at default. SEPTEMBER 27,

7 Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Corporates - General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016 Criteria - Corporates - Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Leisure And Sports Industry, March 5, 2014 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Ratings Affirmed NH Hotel Group S.A. Corporate Credit Rating B/Stable/-- Senior Secured BB- Recovery Rating 1(95%) Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. 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 the S&P Global Ratings' public website at Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; SEPTEMBER 27,

8 Stockholm (46) ; or Moscow 7 (495) SEPTEMBER 27,

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