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Rating Action:

Moody's downgrades Grupo Posadas' ratings to Ca, outlook remains negative

29 Jun 2020

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.

RATINGS RATIONALE

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.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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.

Sandra Beltran
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
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

No Related Data.
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