MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings affirms Grupo Posadas, S.A.B. de C.V.'s (Posadas) ratings as follows:
--Local and Foreign Currency Long-Term Issuer Default Ratings (IDRs) at 'B'; Outlook Stable;
--National scale rating at 'BB+(mex)'; Outlook Stable;
--Outstanding USD38 million senior notes due in 2017 at 'B+/RR3';
--USD400 million senior notes due 2022 at 'B+/RR3'.
Posadas' ratings are supported by the company's solid business position as a leading hotel chain in Mexico, strong brand equity and operating performance, as well as its multiple hotel formats. Conversely, the ratings are tempered by high leverage, as well as industry cyclicality. Posadas' presence in all major urban and coastal locations in Mexico, consistent product offering and 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 travellers of different income levels as well as tourists, diversifying its revenue base.
The 'RR3' Recovery Rating assigned to the issuances indicates good recovery prospects given default. 'RR3' rated securities have characteristics consistent with security historically recovering 51%-70% of current principal and related interest.
KEY RATING DRIVERS
Solid Business Position
Posadas' ratings are supported by the company's solid business position, strong brand name and multiple hotel formats. Conversely, the ratings are tempered by high leverage, as well as industry cyclicality. 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.
Posadas operating performance continue to improve since the last two years. Revenue per available room (RevPAR) has increased, particularly in owned and leased hotels; driven by higher average daily rate (ADR) and to a lesser extent higher occupancy. System wide occupancy has remained stable, above 65%, although coastal locations have outperformed urban ones, both for managed, as well as owned and leased properties. Furthermore, vacation club sales have improved, as increased occupancy in coastal locations has increased cross-selling opportunities.
Correlation to Economic Cycles
The ratings incorporate the industry's high correlation to economic cycles, which negatively affects operating trends in downturns and increases volatility of operating results. The use of multiple hotel formats allows the company to target domestic and international business travellers of different income levels, in addition to tourists, thus diversifying its revenue base. Geographic diversification is limited as Posadas' operations are primarily located in Mexico.
Capex Funded with Cash Flow
Fitch expects higher capex levels reaching up to MXN1 billion for the next few years mainly related to Club Vacation projects in Los Cabos and Acapulco as well as the remodeling of rooms. These investments are expected to be funded with on hand resources, which will result in no additional debt for the company. Fitch incorporates Posadas' growth strategy of mainly managing hotels, as opposed to owning the properties. New openings should continue for all brands, mainly Fiesta Inn, Fiesta Americana and One, which are mostly under managed and leased formats.
Leverage Still High
Fitch expects Posadas to maintain its total adjusted debt to - EBITDA close to 5.0x in the short term and then gradually decline toward 4.5x. Leverage improvement is expected to come from higher EBITDA generation, as total debt should remain stable as the before mentioned capex will be funded with internally generated cash flow. As of March 31, 2016, Posadas' total debt was unsecured; however, the company has a MXN200 million undrawn secured facility.
Fitch's key assumptions within the rating case for Posadas include:
--Adjusted debt to EBITDAR around 4.5x in the medium term;
--Consolidated EBITDA above MXN1 billion;
--Broadly stable KPIs in the short to medium term;
--Capex funded with internally generated cash flow;
--Payment of the outstanding senior notes due in 2017.
Negative Trigger: Negative factors for credit quality could include any weakening of operating trends or decreases in RevPAR that could lead to lower EBITDA and cash flow levels, as well as cash outflows or incurring debt that results in adjusted debt/EBITDAR consistently higher than 5.0x.
Positive Trigger: Positive factors of the company's creditworthiness include stable EBITDA generation, consolidating gains in operating indicators and a proven track record of stronger and stable credit metrics, such as adjusted debt/EBITDAR consistently below 4.5x.
Liquidity is sound. Assuming the repayment of the USD38 million senior notes, the only maturity will be the senior notes due in 2022. Cash balances as of March 31, 2016 were USD92 million. The additional USD12 million will be used for general corporate purposes. As of March 31, 2016, Posadas has no committed credit facilities and has a secured uncommitted revolver facility for MXN200 million.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 05 Apr 2016)
Dodd-Frank Rating Information Disclosure Form