New York, August 16, 2021 -- Moody's Investors Service ("Moody's") affirmed
Hyatt Hotels Corporation's ("Hyatt") Baa3 senior unsecured
rating following the company's announcement[1] that it plans
to acquire Apple Leisure Group ("ALG", Casablanca Global
Intermediate Holdings L.P., Caa2 negative) for about
$2.7 billion from affiliates of each of KKR and KSL Capital
Partners, LLC. The outlook remains negative. Ratings
are subject to review of final documentation.
The $2.7 billion acquisition will be funded with a combination
of $1 billion of cash, new debt financings and about $500
million of equity financing. Hyatt has secured a $1.7
billion financing commitment from J.P. Morgan. Concurrent
with the acquisition announcement, Hyatt announced a $2.0
billion asset sale commitment by 2024 with the proceeds being used to
pay down debt, including debt raised to fund the acquisition.
The transaction is expected to close in the fourth quarter of 2021.
"Moody's views the acquisition of ALG as credit positive,
it increases Hyatt's scale in the fast-growing all-inclusive
segment and the planned asset sales further reduces the company's
earnings reliance on the more volatile owned hotel portfolio,"
stated Pete Trombetta, Moody's lodging analyst. "The
positive attributes of the transaction are partially offset by the use
of $1 billion of cash to fund the transaction during a time when
earnings continue to be significantly pressured by the impact of the global
pandemic," added Trombetta. The affirmation reflects
governance considerations, including Hyatt's asset sale strategy
and its public commitment to returning to -- and maintaining --
investment grade metrics. Hyatt's announcement that it will
sell an additional $2 billion of assets over the next three years
with the proceeds used to repay debt associated with this transaction
is viewed favorably and is a key factor in the affirmation.
Affirmations:
..Issuer: Hyatt Hotels Corporation
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa3
Outlook Actions:
..Issuer: Hyatt Hotels Corporation
....Outlook, Remains Negative
RATINGS RATIONALE
The affirmation reflects the positive attributes of the ALG acquisition
-- the transaction immediately increases Hyatt's managed/franchised
portfolio by 33,000 rooms focused in the fast-growing all-inclusive
segment, reduces the company's reliance on its owned portfolio
and increases its earnings generated from leisure travel. The affirmation
also takes into consideration Hyatt's strategy of selling a portion
of its owned asset base, which Moody's views as more volatile
during industry downturns, and growing its managed/franchised business
which Moody's views as credit positive.
Factors related to this transaction that constrain the company's
credit profile include the use of about $1 billion of cash that
has been used to bolster the company's liquidity during this time
of significant earnings pressure related to the global pandemic.
Given the uncertainty over the coming quarters caused by the Delta variant,
increasing COVID cases in some regions, and the delay in some offices
bringing back employees -- and thereby slowing business travel recovery
-- any reduction in liquidity is viewed unfavorably. Hyatt
reported cash and short term investments at June 30, 2021 of $1.7
billion. Pro forma for the transaction, the $254 million
tax refund received in July and $250 million of debt repaid today,
the company's cash balances approximate $660 million (this
does not include any potential proceeds from asset sales expected this
year). While Hyatt's overall liquidity profile is considered
excellent it is largely due to Hyatt's full access to its $1.5
billion revolver due January 2023. Moody's view that Hyatt's
liquidity remains excellent is predicated on the expectation that Hyatt
will absolutely ensure that it has ample cushion to meet the financial
covenants contained in the revolving credit facility -- particularly
when its leverage covenant is reinstated in the first quarter of 2022.
Also considered a credit negative is the high purchase price multiple
-- low double-digit multiple on ALG's 2023 EBITDA includes
ALG's Unlimited Vacation Club ("UVC")segment earnings on a cash flow basis,
not on a GAAP basis. The purchase price also includes two segments
of ALG which Moody's does not view as strategic to Hyatt's
core operations -- the Vacations and UVC segments. The UVC
segment generates positive net cash flow in the early years of the contract
sales but is EBITDA negative on a GAAP basis as the revenue from the program
are deferred as members receive benefits over the longer duration of the
contracts. The ability for UVC to continue to grow its new members
base is important for its ability to maintain its current level of cash
generation and Moody's views the market for vacation clubs to be
narrow. The Vacations segment is a distribution business that sells
packaged vacations, including to non-Hyatt branded properties.
The negative outlook reflects the uncertainty around the pace, timing
and level of business travel recovery, which pro forma for this
transaction still accounts for a little more than 50% of Hyatt's
earnings, and Hyatt's ability to return to metrics appropriate
for its Baa3 rating. Moody's forecast that Hyatt's
debt/EBITDA will be above its downgrade factor of 4.0x until 2023.
Hyatt has excellent liquidity over the next 12 months with pro forma cash
balances of about $660 million (excluding any asset sales) and
full availability under its $1.5 billion revolver due January
2023. In addition to the $250 million maturity in 2021 included
in the pro forma cash balance, there is also $750 million
maturing in 2022. On March 18, 2021, Hyatt entered
into an amendment to its credit agreement that, among other things,
suspended the maintenance leverage covenant until January 1, 2022.
The amendment also adds a new minimum fixed charge coverage ratio covenant
with a maintenance level of 1.25 to 1.0 applicable to the
first quarter following the end of the covenant relief period.
Following this, the leverage covenant maintenance level is increased
for the second, third, fourth and fifth quarters following
the end of the covenant relief period to the level of 7.5 to 1.0,
6.5 to 1.0, 5.5 to 1.0 and 5.0
to 1.0, respectively. The company must also maintain
a minimum daily liquidity requirement of $450 million.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if there is any deterioration in liquidity
or if there is slower than expected improvement in travel demand,
occupancy and pricing trends that stalls free cash flow growth in 2022
such that Hyatt can only repay a modest level of debt. Any indication
that travel demand will not return to historic levels with debt/EBITDA
remaining above 4.0x over the longer term could also lead to a
rating downgrade. The outlook could be revised to stable if there
are indications that the pace of earnings recovery will lead to debt/EBITDA
approaching 3.75x. An upgrade could come if travel demand
returns to near prior levels and debt/EBITDA is sustained below 3.5x.
Prior to the ALG acquisition, Hyatt Hotels Corporation owns,
manages and franchises a portfolio of hotel brands -- containing
1,020 properties (about 244,600 rooms) in 68 countries --
operating under Park Hyatt, Grand Hyatt, Hyatt Regency,
and Hyatt Place, and other Hyatt related brands. The Pritzker
family directly or indirectly owns 59.1% of Hyatt's common
stock and controls 90.6% of the voting stock. Net
revenues for the trailing 12 month period ended June 30, 2021 were
about $690 million.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
REFERENCES/CITATIONS
[1] Form 8-K (SEC) 16-Aug-2021
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Peter Trombetta
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
