Fitch Rates Wyndham's Sr. Unsecured Term Loan 'BBB-'

NEW YORK--()--Fitch Ratings has assigned a 'BBB-' rating to Wyndham Worldwide Corporation's (WYN) $325 million senior unsecured term loan. The term loan ranks pari passu with existing unsecured debt and matures March 24, 2021. A full list of ratings is provided at the end of this release.

Fitch expects the transaction to be leverage-neutral as proceeds of the term loan, in part, were used to redeem $315 million of outstanding 6% senior notes due 2016. The term loan carries a floating interest rate and features no amortization for the first three years. Beginning in March 2019, the loan amortizes with quarterly principal payments of $4.1 million until March 2020 and then $8.1 million quarterly through maturity.

The Rating Outlook remains Stable.

KEY RATING DRIVERS

The ratings reflect Wyndham's strong free cash flow (FCF) profile, the majority of which is made up of recurring fee income generated by its lodging, vacation exchange and rental and timeshare segments.

The ratings also consider management's public commitment to maintain low investment-grade credit metrics. However, the company has indicated a willingness to let its credit ratings fall to a high speculative grade for a strategic acquisition, provided management sees a path to returning to investment grade over a reasonable time period.

The Stable Outlook reflects Fitch's expectation that WYN will continue to operate within our target adjusted leverage of 3.25x, with a firm cap at 3.5x at the 'BBB-' rating level. Fitch's ratings have limited tolerance for leverage sustaining above 3.5x on an annual and quarterly basis.

Fitch would expect the company to swiftly reduce leverage back closer to our 3.25x target for the rating if, for example recent improvements in WYN's loan loss provision and timeshare inventory procurement costs prove unsustainable through the cycle.

KEY ASSUMPTIONS

--U.S. lodging industry RevPAR growth increases by 4%-5% during 2016 and remains positive, in the mid- to low-single-digit range, for the balance of the forecast period.

--Flat to slightly negative results in WYN's vacation exchange and rentals business as low single-digit member gains at RCI are offset by a secular decline in average spend per member.

--Modest improvement in the company's timeshare sales revenue driven by improved volume per guest (VPG).

--Continued emphasis on sourcing less capital intensive timeshare inventory through discounted repurchases and its WAAM third-party development funding model.

--WYN returns its excess FCF to shareholders through dividend increases and share repurchases, regulating the latter to maintain at or near Fitch's 3.25x leverage target at the 'BBB-' rating.

--Fitch's ratings do not contemplate WYN undertaking a 'transformative' acquisition.

RATING SENSITIVITIES

--Fitch has set Wyndham's core lease-adjusted leverage target at 3.25x with a cap of 3.5x for an Issuer Default Rating (IDR) of 'BBB-'/Outlook Stable. There is only limited tolerance in the current rating/Outlook for leverage at or above 3.5x on both an annual and quarterly basis. Fitch allows for leverage to be slightly above its target level at 'BBB-' due to Wyndham's strong FCF profile. Wyndham's core lease-adjusted leverage (excluding securitized timeshare debt and related financing income) was 3.2x as of Dec. 31, 2015.

--Wyndham's off-balance-sheet commitments have increased recently and further increases could have a negative impact on the ratings and/or Outlook.

--Wyndham's current FCF/debt ratio is 18.4%, which is very strong for the rating category. If the company's FCF/debt deteriorated to below 15% without the company reducing leverage to within 3.25x, there would be negative pressure on the rating/Outlook.

--Negative rating pressure could result if Fitch's outlook for development spending and the capital intensity of the company's businesses were to increase materially.

--Reducing and sustaining leverage at around 2.75x and the adoption of more conservative financial policies could result in upward momentum for Wyndham's ratings/Outlook. Fitch does not expect this to occur.

FULL LIST OF RATINGS

Fitch currently rates Wyndham as follows:

Wyndham Worldwide Corp.

--Long-term IDR at 'BBB-';

--Short-term IDR at 'F3';

--Senior unsecured revolving facility at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Commercial paper at 'F3'.

Wyndham Global Finance PLC

--Commercial paper at 'F3'.

Date of Relevant Committee: Aug. 14, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001720

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Stephen Boyd, CFA
Director
+1-212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA
Managing Director
+1-212-908-9113
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Boyd, CFA
Director
+1-212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA
Managing Director
+1-212-908-9113
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com