New York, April 27, 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 Caa1 from B2. The outlook was changed to negative.
The action follows the rapid deterioration of its operating performance
during the sanitary emergency in Mexico as a consequence of the coronavirus
outbreak and considers the refinancing risk related to Posadas' 2022 notes,
with tightening capital markets conditions and the high likelihood of
a distressed exchange. This action concludes the review for downgrade
that was initiated on March 6, 2020.
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 also reflects our view that there is a high likelihood of
a distressed exchange in light of the sharp deterioration in Posadas'
operating performance, coupled with its need to refinance its 2022
notes amid tightening capital markets conditions.
On April 10, 2020 Posadas announced that in line with the measures
taken by the Mexican authorities to face the coronavirus outbreak amid
the declaration of sanitary emergency state, it has suspended activities
in virtually all the properties under its management. Also since
then, bookings for stays during the lockdown have been suspended.
Originally, the period was expected to conclude on 30 April but
has recently been extended through the end of May. Posadas could
resume its operations in the second half of 2020. 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 tempered by the need to refinance its 2022 notes
amid a challenging environment. The bulk of Posadas' debt is $393
million outstanding under senior notes maturing in June 2022. As
of March 23, 2020, Posadas had MXN1.6 billion of cash
on hand, out of which some MXN1.2 billion or $51 million
is denominated in US dollar, representing 75% of total cash.
We expect that current cash will be enough to cover short term needs including
lease commitments of MXN750 million, interest expense amounting
$30 million (MXN615 million) and maintenance capex. However,
the MXN1.5 billion cash burn reported in 2019 highlights the risk
of a rapid deterioration.
Under the current environment, the company has made clear its priority
of preserving liquidity. Therefore, the company has not repurchased
shares and is working with vendors and other partners in order to preserve
working capital or, if needed, raise additional liquidity
resources in compliance with its financial covenants.
The negative outlook reflects the risk of a weaker scenario from coronavirus
given the fluid situation and the tightening liquidity.
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
Posadas' ability to cover corporate expenses such as interests,
salaries, taxes and working capital with internal sources or if
committed investments are at risk.
Ratings could be upgraded once the pandemic is over and there are clear
signs of recovery in Posadas operations. Moreover, Posadas
liquidity should be enough to cover short term needs with internal sources,
cash generation or committed funding sources.
Posadas is the leading hotel operator in Mexico that owns, leases,
franchises and manages 184 hotels and 29,851 rooms in the most important
and visited urban and coastal destinations in Mexico. Urban hotels
represent 81% of total rooms and coastal hotels represent 19%.
Posadas trades in the Mexican Stock Exchange since 1992.
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.
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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