MOODY'S CONFIRMS GRUPO POSADAS' CORPORATE FAMILY RATING AND SENIOR UNSECURED NOTES AT Ba3; OUTLOOK STABLE
Approximately $225 Million of Rated Debt Securities Affected
Mexico City, March 14, 2006 -- Moody's Investors Service, Inc. today confirmed Grupo Posadas,
S.A. de C.V.'s ('Posadas')
corporate family rating and senior unsecured notes at Ba3, concluding
the review for downgrade initiated on December 2, 2005. The
confirmation reflects the acceptable impact on credit metrics from the
recent investment in Grupo Mexicana de Aviacion, S.A.
de C.V. ('Mexicana'), Mexico's second
largest airline, Moody's expectation that Posadas will not
provide any financial support should the airline experience financial
distress, and that Posadas will reduce its investment to less than
30 percent over the near term (from currently 49.7 percent).
The rating action also incorporates Posadas' good recent operating
performance, and its leading position and strong brand name recognition
in its markets. The outlook is stable.
The following ratings were confirmed:
- Corporate Family Rating, at Ba3;
- Senior Unsecured Regular Bond/Debenture, at Ba3.
The outlook is stable
In December 2005, Posadas purchased a 95% stake in Mexicana
from state owned Cintra holding (now 'Consorcio Aeromexico')
for US$165.5 million in cash. Immediately after the
purchase, Posadas sold US$79 million of the acquired Mexicana
shares to several private investors, effectively leaving the company
with a 49.7 percent interest valued at US$87 million.
Moody's expects the company to sell a further 20.1 percent
stake in Mexicana over the near term in order to reduce its investment
to 29.6 percent or US$53 million, although the exact
timing and form of such a transaction currently remain uncertain.
The US$87 million investment in Mexicana was financed with US$50
million in incremental debt, including a US$35 million off-balance
sheet bridge loan secured by Mexicana shares of equal value, US$17
million in new equity, US$12 million in asset sales proceeds
and a small portion of the company's cash reserves. Moody's
treats the bridge loan as debt because of its nearing maturity date mid
2006 and the lack of contractually committed divestiture plans for the
20.1 percent stake in Mexicana which serves as collateral.
The Mexicana investment has somewhat weakened the company's position
in its rating category but credit metrics remain appropriate as a result
of cyclically strong earnings and acceptable cash flow performance.
For the fiscal year ended December 31, 2005, debt to EBITDA
and total coverage were 4.6 times and 2.0 times, respectively
(vs. 4.5 times and 2.1 times in fiscal 2004),
while the free cash flow to debt ratio was 5.0 percent.
(Ratios reflect Moody's standard adjustments.).
Fiscal 2005 operating performance was solid, with sales growing
14.3 percent (in nominal terms), and operating margin increasing
to 16.0 percent from 15.4 percent in 2004. Revenues
per available room (RevPAR) and occupancies exceeded 2004 levels when
excluding the hurricane season's impact on the company's Cancun
and Cozumel coastal hotels, while EBITDA grew 16.0 percent
to US$116 million.
Posadas's ratings continue to be supported by the company's leading position
in the Mexican hotel industry; strong brand name recognition;
national coverage and business diversification; the company's expansion
strategy which has in the recent past shifted towards the more profitable
and less capital intensive management of third party hotels; a track
record of US$20 million to US$30 million in annual free
cash flow generation; and an experienced management team which has
faced adverse macroeconomic conditions.
Posadas is Mexico's largest hotel chain with more than 76 hotels and 14,000
rooms in operation domestically and about 16 hotels and 3,000 rooms
in the Texas, Brazil and Argentina. The company operates
under the Fiesta Americana and Fiesta Inn brands in Mexico and Caesar
Park and Caesar business brands in Brazil and Argentina. Recently,
it has also launched an economy class concept in Mexico, called
"one hotels". Most of Posadas' hotels are located in large
to medium sized cities and somewhat less than a third are located in popular
Moody's expects Posadas' performance to remain solid in 2006,
with improvements in RevPAR and margins, and anticipates that free
cash flow will remain close to 2005's level of about US$32
million. Moody's notes that of the five hotels damaged by
hurricane Wilma, four have been reopened in the meantime but occupancy
levels in the region may remain low well into 2006, although we
do not anticipate this to materially impact results.
Moody's notes that benefits from the investment in Mexicana,
such as cost savings and an improved competitive position, may be
feasible but could be more than offset by risks related to the airline's
weak financial and business profiles. Mexicana is highly levered
on a lease adjusted basis, has tight liquidity, and faces
tough and growing competition on international and domestic routes.
In addition, similar to many of its international peers, the
airline has an unfavorable cost structure, impacted by rising fuel
costs and material labor obligations.
The rating confirmation is based on our assumptions that Mexicana has
no legal recourse to the company (such as performance or debt guarantees)
and that it will not provide any financial support should the airline
experience financial distress. A violation of these assumptions
will likely trigger a negative rating action. Posadas' ratings
could also be impacted should Mexicana's equity earnings contribution
significantly affect Posadas' net income, or if the cooperation
between the companies creates material unexpected funding needs for Posadas.
Besides its highly levered financial profile, Posadas' ratings are
also constrained by the intense competition it faces from other international
and domestic chains in its major business segments; its limited scale
relative to other hotel chains rated by Moody's; and its modest liquidity,
as evidenced by the lack of committed backup facilities and limited cash
reserves. We assume that the company will be able to refinance
about US$24 million in peso denominated certificados bursatiles
due in July 2006 using the remaining availability under its recently arranged
US$50 million committed, sr. unsecured syndicated
credit line dedicated for this purpose.
The stable outlook reflects Moody's expectation that Posadas will maintain
its leading position in its home market; that earnings, cash
flows and capital spending will remain appropriate for the rating category;
that free cash flow will be employed for debt reduction and to maintain
adequate liquidity; that no financial support will be provided to
Mexicana; and that the airline investment will be reduced to less
than 30 percent over the near term.
Positive rating pressure is unlikely to develop in the near term,
because of weakened credit metrics following the Mexicana investment and
uncertainties related to the exact form and cost of cooperation between
Mexicana and Posadas. Longer term, the ratings or outlook
could be raised if earnings, cash flow and market position improve
on a sustainable basis; if the Mexicana investment proves to support
the bondholders' position; and if debt to EBITDA falls below
4.0 times and total coverage rises above 2.5 times.
The ratings or outlook could be downgraded if Posadas provides financial
support to Mexicana; if the company fails to reduce its investment
in the airline as envisioned; if earnings and free cash flow deteriorate
throughout the cycle without debt having been sufficiently cut to maintain
appropriate credit metrics; or if debt to EBITDA rises above 5.0
times and total coverage falls below 1.5 times for any of these
or other unforeseen reasons.
Grupo Posadas, headquartered in Mexico City, Mexico,
is the country's largest hotel chain. The company also operates
a growing time share business in Mexico under the Fiesta Americana Vacation
Club brand. For the fiscal year ended December 31, 2005,
Posadas reported sales of about US$481 million and EBITDA of US$116
Corporate Finance Group
Moody's Investors Service
Corporate Finance Group