New York, June 29, 2020 -- Moody's Investors Service ("Moody's") has downgraded
Grupo Posadas, S.A.B. de C.V.
("Posadas")'s corporate family rating and the senior unsecured
rating on its 2022 notes to Ca from Caa1. The action follows Posadas'
announcement that it will not pay the $15.5 million coupon
due on June 30, 2020 on its 7.875% senior notes due
2022. Since the company will not make such payment during the subsequent
30-day cure period, it will constitute an event of default.
The outlook on the ratings remains negative.
Posadas' Ca rating reflects its weak liquidity in light of the business
challenges ahead. Since the social distancing measures started
in Mexico as a consequence of the coronavirus pandemic, Posadas'
cash burn has been close to MXN100 million per month. Although
the company's cash position is enough to cover some nine months
of cash burn at the currently low occupancy levels, liquidity will
rapidly deteriorate. Under the current environment, bondholders
are at risk of having losses in the 35% - 65% range,
consistent with the Ca rating.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The lodging sector has
been one of the sectors most significantly affected by the shock given
its exposure to travel restrictions and sensitivity to consumer demand
and sentiment. Today's action reflects the impact on Posadas of
the breadth and severity of the shock, and the broad deterioration
in credit quality it has triggered. We regard the coronavirus outbreak
as a social risk under our ESG framework, given the substantial
implications for public health and safety.
The downgrade follows Posadas' decision to refrain to pay the interest
coupon due in June, 2020 in order to preserve cash to ensure the
continuity of its business. The coronavirus pandemic and the subsequent
social distancing measures have resulted in a significant deterioration
of the Mexican tourism sector. As such, Posadas' revenues
and cash flow have weakened substantially. Moreover, we do
not expect any support from the Government of Mexico to this industry
as no specific measures have been announced and considering the overall
small scale of the government's response to the pandemic. Therefore,
we anticipate Posadas operations will remain subdue through 2021.
Slow pace of re-openings through 2021 will continue to erode Posadas
ability to generate cash. As of today, the company has reopened
114 hotels and expects to reopen an additional 42 by mid-July.
However, occupancy is restricted to close to 30%, while
the sanitary state of emergency continues, for an indefinite period.
Additionally, Posadas will incur in higher costs during this period
to mitigate guests' health concern. Posadas recently launched
the "Travel with Confidence" program incorporating high health
and hygiene standards to ensure guests feel safe traveling to its hotels.
The company has reported that, while cancellations for stays through
the second quarter of 2020 have been historically high, there have
not yet been meaningful group cancellations related to the coronavirus
outbreak for 2021, and many group customers are at least rebooking
for 2021. However, there are high risks of more challenging
downside scenarios as the situation is fluid and the severity and duration
of the pandemic and travel restrictions are still uncertain.
Posadas' liquidity is weak, tempered by high cash burn during the
peak of the pandemic. Although current cash is close to MXN 900
million, still enough to cover operating cash expenses, taxes
and interest, the cash burn estimated at MXN 100 million in June
reflects the risk of a rapid deterioration in the current environment.
Therefore, the company decided to refrain to pay the $15.5
million coupon payment due 30 June and to preserve cash to maintain the
operations. Considering current cash burn and cash position and
some occupancy improvement, Posadas might be able to make it through
the end of the year, but a close to MXN300 million payment commitment
with the Mexican tax authorities (SAT) scheduled early 2021 adds substantial
pressures to the operation. The bulk of Posadas' debt are the global
senior notes amounting $393 million. The notes will mature
in June 2022, but payment will accelerate to the end of July 2020
once the cure period of the missed coupon payment is over. Afterwards,
Posadas will look to reorganize its capital structure while remaining
operational. Still, we expect that losses for existing unsecured
creditors could be higher than 40%.
The negative outlook reflects Moody's view of a prolonged recovery of
the tourism industry in Mexico and Posadas' limited financial flexibility,
which would derive on higher losses to bondholders than currently anticipated.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if Posadas is not able to fully resume its
operations this year and if the cash burn continues, threatening
the company's' ability to cover corporate expenses such as interests,
salaries, taxes and working capital with internal sources or if
committed investments are at risk. In this scenario, bondholders'
losses will be above 65%.
Ratings could be upgraded once the pandemic is over, Posadas restructures
its balance sheet, and there is more visibility about Posadas future
operating performance. For a positive rating action to occur,
Posadas' liquidity should be enough to cover short term needs with
cash generation or committed funding sources.
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.
Posadas is the leading hotel operator in Mexico that owns, leases,
franchises and manages 179 hotels and 28,000 rooms in the most important
and visited urban and coastal destinations in Mexico. Urban hotels
represent 85% of total rooms and coastal hotels represent 15%.
Posadas trades in the Mexican Stock Exchange since 1992.
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.
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Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
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No. 405 - 502
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Mexico, DF 11000
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
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Moody's Investors Service, Inc.
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