Fitch Ratings Affirms Grupo Posadas IDR at 'BB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the foreign currency and local currency Issuer Default Ratings (IDR) of Grupo Posadas, S.A.B. de C.V. (Posadas) as well as the issue rating on Posadas' senior notes due 2011 at 'BB'. Fitch has also affirmed the national scale rating of Posadas at 'A+(mex)', including all of its 'Certificados Bursatiles' issuances. The Outlook on all ratings is Stable.

The rating affirmation is based on Posadas' good operating performance during 2007 and first half of 2008 as well as an improving financial profile. The company has continued to perform positively, steadily growing its number of rooms while maintaining occupancy rates stable and increasing revenue per available room (REVPAR). Posadas has based its hotel expansion strategy mostly through lease and management agreements which require less capital investments and related borrowing for the company, helping it preserve a stable financial position.

The ratings reflect the company's solid business position, strong brand name and multiple hotel formats. Posadas' presence in all major urban and coastal locations in Mexico, consistent product offering and quality brand image have resulted in occupancy levels that are above the industry average in Mexico. The use of multiple hotel formats allows the company to target domestic and international business travelers as well as tourists. Operations are primarily located in Mexico, which limits geographic diversification. The ratings also consider the industry's high correlation to economic cycles, which might affect operating indicators negatively in downturns.

The ratings also consider an improved business mix with greater diversification of revenues and EBITDA generation by segment as the managed hotels, services segment and the vacation club segment grow at higher rates than the traditional owned hotel segment and become a more important part of the overall business model. Revenues from the vacation club have increased steadily in recent years accounting for 17% of total revenues in 2007 and are expected to represent a growing percentage of revenues in the medium term. The management segment represented 22% of total revenues during the year.

During 2007, revenues increased 5.6% from the prior year totaling US$548 million reflecting growth in the number of hotels and rooms available combined with a better REVPAR as well as increased revenues from its services and vacation club segments. While profitability during 2007 was lower than in the previous year mainly as a result of the sale of some hotels in 2006 which helped push margins upward, EBITDA generation increased during the year to US$134 million from US$126 million in 2006. Results for the first half of 2008 continue to be positive, with revenues growing by 15% to US$332 million through the first six months of the year and EBITDA reaching US$74 million.

Posadas faces a comfortable debt maturity schedule and has a track record of positive free cash flow generation. The company recently issued approximately US$73 million in the local markets to refinance upcoming maturities and existing debt, improving its debt profile while also reducing funding costs. At June 30, 2008, on-balance sheet debt reached US$399 million of which 80% was dollar-denominated and the remainder was in pesos. Short-term debt represented 15% of total debt. In addition to that, the company had approximately US$194 million of off-balance sheet debt related to hotel leases. The company has comfortable liquidity with a balance of cash and marketable securities of US$43 million at June 30, 2008.

The ratio of total adjusted debt to EBITDAR reached 3.4 times (x) during the first six months of 2008, an improvement from 3.6x from the same period in 2007. Adjusted interest coverage measured by the ratio of EBITDAR to financial expense plus rent expense was 2.7x remaining relatively stable from past years. For the remainder of 2008 and 2009, EBITDA growth should be driven by higher revenues from the incorporation of new managed hotels and the Fiesta Americana Vacation Club. With debt levels expected to remain stable due to relatively low capital investment requirements, this should translate into a gradual improvement in credit protection measures.

Capital expenditures reached US$43 million in 2007, related to maintenance, conversion of hotels to the Vacation Club format and technology updates. During the year, the company opened 10 new hotels. In the first half of 2008, the company has opened five new hotels (four in Mexico and one in Argentina), and capital expenditures have totaled US$17 million. Posadas plans to open approximately 53 new hotels over the next 36 months which will require a cash outlay by the company of approximately US$8 million or 2% of the total estimated investment of US$383 million, as the vast majority of new openings will be under management and lease agreements. The company's growth strategy will be mainly focused towards its One Hotels (Economy Class) and Fiesta Inn formats.

Grupo Posadas is the largest hotel operator in Mexico, with 107 hotels and 19,368 rooms across Mexico (85% of total rooms), Brazil (10%), United States (4%), Argentina (1%) and Chile (1%). Approximately 78% of rooms are in urban locations, with the remaining 22% in coastal destinations. The company manages different hotel formats (under a combination of owned, leased and managed properties) that include Fiesta Americana, Fiesta Inn and One Hotels in Mexico, and Caesar Park and Caesar Business in Brazil, Argentina and Chile. The company owns a minority equity stake (30%) in Grupo Mexicana de Aviacion S.A. de C.V. (Mexicana), one of Mexico's two largest commercial airlines. The company believes its investment in Mexicana brings strategic advantages and synergies in information, technology, commercialization and marketing and strengthens their leadership in the Mexican tourism sector. Fitch's rating takes into consideration that Posadas won't invest additional funds into Mexicana in the future. For the year ended Dec. 31, 2007 Posadas had US$548 million of revenues and US$134 million of EBITDA.

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