NEW YORK--(BUSINESS WIRE)--(This is a correction to a release published earlier today. It corrects the cost synergies for Marriott).
Fitch Ratings has affirmed Marriott International's (NYSE:MAR) Long-Term Issuer Default Rating (IDR) at 'BBB' and Short-Term IDR at 'F2'. The Rating Outlook remains Positive.
Fitch has also affirmed Starwood Hotels & Resorts Worldwide, Inc.'s IDR at 'BBB' and maintained the Positive Rating Outlook.
A full list of the rating actions taken for both companies follows at the end of this release.
KEY RATING DRIVERS
Fitch believes the added scale and diversification stemming from Marriott's Sept. 23, 2016 acquisition of Starwood Hotels & Resorts, Inc. will improve its credit profile and will be more consistent with a 'BBB+' IDR. This assumes a smooth integration and that Marriott does not change its financial policy that includes managing adjusted leverage at its stated 3.0x to 3.25x target. The combined company's lower business risk profile will provide Marriott with greater cushion to navigate future lodging cycle downturns.
Marriott now has the largest high-quality, internationally recognized brand portfolio in the industry (30 brands). Acquiring Starwood also enhances the company's position in advanced emerging markets. Lastly, Fitch estimates cost synergies of $250 million, primarily stemming from the elimination of duplicative functions and scale economies. This suggests that the company will have a permanently lower fixed cost structure and stronger free cash flow margin following the planned sale of approximately $1.5 billion of legacy Starwood-owned hotels.
Fitch views the reaction of Marriott's and Starwood's franchisees as a key risk stemming from the transaction. To resolve the Positive Outlook, Fitch will consider the combined company's ability to demonstrate similar or enhanced gross and net unit growth and achieve cost synergies during the one- to two-year Rating Outlook horizon.
Fitch would consider revising the Rating Outlook to Stable from Positive if management changes its financial policy and opts to maintain leverage at a level higher than 3.0x to 3.25x. To that end, Fitch believes Marriott is committed to maintaining a 'BBB' rating, and the company does not presently see strategic reasons for targeting a higher rating.
Financial Policy Unchanged
Fitch's ratings case projections assume the company sustains leverage within its stated 3.0x to 3.25x target range at the through 2018, excluding any non-routine transaction costs incurred during 2016 and 2017, which the company estimates will total $374 million.
Fitch also expects Marriott to move swiftly to complete Starwood's owned asset disposition program by selling, and, in most cases taking back long-term franchise/management contracts, Starwood owned hotels with approximately $1.5 billion of company estimated proceeds. Marriott's demonstrated ability to execute asset sales on a global basis, as well as cloud cover provided by the transaction synergies will help expedite the sales process.
Increased Scale and Diversity
Combining with Starwood strengthened Marriott's credit profile by adding scale and diversity, resulting in lower business risk. Marriott now controls the largest and most diversified hotel brand portfolio, spanning 5,974 hotels with 1.2 million rooms across 30 brands.
The combination will also bolster Marriott's international presence and enhance its relationship with affluent leisure and millennial travelers, many of which favor Starwood brands. Starwood also brings a strong portfolio of lifestyle brands and leisure presence to the table, as well as its Starwood Preferred Guest loyalty system. The legacy Starwood hotel system will benefit from Marriott's strong positions with large group and business travelers.
Positive Franchisee Reaction is Key
Fitch sees moderate execution risk related to the transaction, primarily stemming from the company's franchisee relationships. This risk encompasses the combined company's ability to attract and retain franchisees to its system and is likely to play out over many years as existing Marriott and Starwood franchise and management contracts expire. Only a small amount of legacy Starwood contracts are terminable by the franchisee at will, or upon change of control.
There is an element of franchisee dissatisfaction within the lodging industry regarding the proliferation of new hotel brands from the major lodging brand owners, including Marriott. Marriott has historically been a leader in creating new brands to target an ever more granularly segmented traveler. Although theoretically designed to appeal to different customers, in practice there has been some level of overlap, which reduces the value franchisees receive from affiliating with a given brand and could hamper the company's rooms system growth.
In addition, Marriott and Starwood each own hotel brands that compete head-to-head in the market place, including in adjacent locations that would otherwise be prohibited within current franchise radius restrictions. This could result in an elevated level of brand and/or management contract losses if existing Starwood and Marriott franchisees opt to 're-flag' their properties. Also, some hotel owners have historically expressed a preference for Starwood over Marriott, and vice versa. These owners may opt to re-flag their hotels when contracts expire - regardless of whether a competitive Marriott branded hotel is nearby.
Notwithstanding the above, some merger related aspects will benefit franchisees. For example, the breadth and depth of the combined company's loyalty rewards system will be unmatched in the industry, and the company should benefit from lower administrative costs from combining the programs. In addition, Fitch believes the merger will reduce costs for franchisees in several areas, including training and recruiting, inventory procurement, credit card processing, accounting, IT and revenue management. Lastly, owners should see a benefit from the sharing of best practices, as well as the combined company's deeper understanding of customer travel patterns.
From an organizational perspective, Marriott and Starwood have similar structures that should facilitate the integration of the combined company's regional divisions and ensure a solid level of cost synergies from the elimination of duplicative overhead. Fitch expects the company to use discretionary share repurchases as a lever to maintain leverage at or below its 3.0x to 3.25x target to the extent that cost synergies are lower (or higher) than the $250 million run-rate assumed in our base case projections.
Industry Fundamentals Weakening
Fitch's through-the-cycle approach incorporates cyclicality into ratings. However, and industry downturn that exceeds our -13% to -15% negative RevPAR stress case assumption could lead to negative ratings momentum for U.S. lodging companies. Fitch expects mid-single digit U.S. leisure transient lodging demand growth to decelerate to the low single digits against the backdrop of heightened geopolitical risk, U.S. dollar (USD) strength, growth in alternative lodging accommodations and Zika-virus related health concerns.
Lodging companies have cited relative leisure strength as an offset to weak corporate transient demand. We project that U.S. RevPAR will increase by 3%-4% during 2016 and by 1%-2% during 2017, with monthly comparisons possibly turning negative during the latter half of the year. We expect 2018 to mark the first full year of RevPAR declines, assuming the historical six- to 12-month lag between occupancy and RevPAR declines holds. Weak corporate and decelerating group demand, supports our expectation for RevPAR to turn negative in 2018.
KEY ASSUMPTIONS
--U.S. lodging industry RevPAR growth increases by 2%-4% during 2016 and 1%-2% during 2017, before turning slightly negative in 2018 and 2019;
--Fee revenue grows in-line with gross potential revenue (GPR is a Fitch estimate of total system-wide room revenue from which Marriott can receive fees);
--Franchise fees as a percentage of GPR increase due to limited service additions in North America that are weighted towards the franchise model, as opposed to managed or owned;
--MAR returns its excess free cash flow to shareholders through dividend increases and share repurchases, regulating the latter to maintain at or near Fitch's 3.0x leverage target at the 'BBB' rating.
RATING SENSITIVITIES
--To resolve the Positive Outlook, Fitch will consider the combined company's ability to demonstrate similar or enhanced gross and net unit growth and achieve cost synergies during the one- to two-year Rating Outlook horizon.
--Fitch would consider revising the Rating Outlook to Stable from Positive if management changes its financial policy and opts to maintain leverage at a level higher than 3.0x to 3.25x.
--Fitch expects Marriot to pull back on investment spending and share repurchases, as well as its CP balance in the event of a significant downturn. A negative rating action could take place if Marriott chose not to adjust its capital allocation in a downturn scenario.
--A negative rating action could also occur if a lodging industry downturn occurs that is more severe than Fitch's stress case scenarios, which contemplates industrywide RevPAR declines of 13%-15%. Due at least in part to the more attractive supply growth environment relative to the last recessions, Fitch believes RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 to 2009.
--Marriott's 'F2' short-term rating is supported by its back-up liquidity coverage from its RCF and sufficient internally generated sources of liquidity to amply cover near-term debt service. If these liquidity measures deteriorate over time, there could be pressure on the 'F2' rating.
LIQUIDITY
Marriott has adequate liquidity underpinned by its committed revolving credit facility. At Sept. 30, 2016, total liquidity of $2.2 billion is composed of $1.4 billion in revolver availability and $800 million of Fitch estimated readily available cash that can be used for debt repayment. In connection with the Starwood acquisition, the company expanded the capacity of its revolver, and the commercial paper programs it backs, to $4 billion.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Marriott International, Inc.
--Long-Term IDR at 'BBB';
--Short-Term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Starwood Hotels & Resorts Worldwide, Inc.
--IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Positive.
Fitch has affirmed and withdrawn the following ratings:
Marriott RHG Acquisition B.V.
--Short-Term IDR at 'F2';
--Commercial paper at 'F2'.
Date of Relevant Rating Committee: Nov. 15, 2016
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--No material adjustments have been made that have not been disclosed in public filings of this issuer.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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