Fitch Rates Marriott's $1.5B Unsecured Notes 'BBB'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to Marriott International Inc.'s (Marriott; MAR) planned $1.5 billion, multi-tranche unsecured notes issuance.

The Rating Outlook is Positive. A full list of rating actions follows at the end of the release.

On June 7, 2016, Marriott announced two tranches (series Q and R) of senior unsecured notes with anticipated gross proceeds totaling $1.5 billion. One series will mature in January 2022 and the other during June 2026. Tranche sizing and pricing is not currently available.

The notes rank pari passu with all of Marriott's senior unsecured debt and will be issued under its indenture dated Nov. 16, 1998. Marriott is obligated to repurchase the notes at 101% of par upon change of control, defined as a transfer of more than 50% of voting stock, subject to a ratings-based trigger. The notes do not contain any financial covenants, similar to Marriott's existing bonds.

Marriott will use the proceeds for general corporate purposes, which may include acquisitions, such as its planned purchase of Starwood Hotels & Resorts, Inc. which the company anticipates completing in July.

Fitch estimates that Marriott's leverage will increase to the mid-3.0x range at merger closing and return to within the company's 3.0x to 3.25x policy target by year-end 2016.

As previously disclosed, Marriott revised its Starwood acquisition consideration to $13.6 billion in mid-March in response to a competitive bid for Starwood by an investor consortium. The consideration amount is net of $900 million of Starwood cash and includes a $3.6 billion cash component (up from a previously negligible amount) that Marriott plans to fund with a similar amount of borrowings.

KEY RATING DRIVERS

Fitch continues to see positive ratings momentum for Marriott International stemming from its planned merger with Starwood. However, less creditor-friendly financial terms associated with Marriott's revised offer for Starwood increases execution risk and will likely delay the revision of our Positive Outlook towards the latter part of the one- to two-year Rating Outlook horizon.

Fitch believes the company is committed to its 3.0x-3.25x leverage policy target, and Marriott demonstrated its willingness and ability to reign in share repurchases during the Great Recession. The company did not repurchase any shares during 2009 and 2010, which allowed for $1.3 billion of debt reduction.

MORE EXECUTION RISK

Fitch sees more merger-related execution risk from Marriott's revised offer. Increasing the cash component is a riskier strategy, particularly in the context of an extended lodging cycle where revenue growth is slowing and supply is accelerating.

Marriott will need to execute on asset sales and pull back on share repurchases to return leverage to within its policy target range by the end of this year. Volatile capital markets could make selling Starwood's roughly $2.3 billion owned-hotel portfolio more challenging, although Fitch believes the high-quality portfolio of assets will generate strong institutional investor interest. Marriott could also face pressure from equity investors to sustain a higher level of share repurchases and delay de-leveraging during the year, depending on how its shares perform.

Marriott boosted its merger-related cost savings synergies target to $250 million from $200 million in tandem with announcing its revised Starwood merger offer. The company also gave more attention to potential revenue synergies through enhanced RevPAR penetration for Starwood brands and new unit growth, although it has not included revenue synergies in its guidance.

MERGER BENEFITS UNCHANGED

Fitch affirmed its 'BBB' Long-Term Issuer Default Rating (IDR) and 'F2' Short-Term IDR for Marriott and revised the company's Rating Outlook to Positive from Stable on Nov. 16, 2015, following the Starwood acquisition announcement. Fitch believes Marriott's credit profile will be more consistent with a 'BBB+' IDR after combining with Starwood, even with its unchanged financial policy that includes managing adjusted leverage at its stated 3.0x to 3.25x target.

Fitch expects the acquisition to lower Marriott's business risk profile and improve profitability, which should enhance the company's ability to navigate future lodging cycle downturns. The combined company will have the largest high-quality, internationally recognized brand portfolio in the industry (30 brands). Acquiring Starwood will also enhance Marriott's position in advanced emerging markets.

Fitch would likely revise its Rating Outlook for Marriott International to Stable from Positive if Marriott does not acquire Starwood as planned.

DEAL SUBJECT TO FURTHER APPROVALS

Marriott has received U.S. regulatory approval to purchase Starwood, but still requires the approvals of select EU and China regulators before it can close on the Starwood acquisition.

KEY ASSUMPTIONS

--U.S. lodging industry RevPAR growth increases by 4%-5% during 2016 and decelerates, but remains positive, to the mid- to low-single-digit range for the balance of the forecast period;

--Fee revenue grows in-line with gross potential revenue (GPR is a Fitch estimate of total system-wide room revenue from which Marriott can receive fees);

--Franchise fees as a percentage of GPR increase due to limited service additions in North America that are weighted towards the franchise model, as opposed to managed or owned;

-- Marriott's leverage increases to approximately 3.5x on consummating its Starwood acquisition and returns to the company's 3.0x to 3.25x leverage target within 12-24 months.

RATING SENSITIVITIES

--To resolve the Positive Outlook, Fitch will consider Marriott's progress toward returning leverage to its 3.0x to 3.25x target, the level of merger cost savings achieved and the combined company's gross and net unit growth during the one- to two-year Rating Outlook horizon. Fitch views the latter as a proxy from market/franchisee acceptance of the combination.

--Fitch would consider revising the Outlook to Stable from Positive if management changes its financial policy and opts to maintain leverage at a level higher than 3.0x to 3.25x.

--Fitch expects Marriot to pull back on investment spending and share repurchases, as well as its commercial paper balance in the event of a significant downturn. A negative rating action could take place if Marriott chose not to adjust its capital allocation in a downturn scenario.

--A negative rating action could also occur if a lodging industry downturn occurs that is more severe than Fitch's stress case scenarios, which contemplate industrywide RevPAR declines of 13%-15%. Due at least in part to the more attractive supply growth environment relative to the last recessions, Fitch believes RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 to 2009.

--Marriott's 'F2' short-term rating is supported by its back-up liquidity coverage from its RCF and sufficient internally generated sources of liquidity to amply cover near-term debt service. If these liquidity measures deteriorate over time, there could be pressure on the 'F2' rating.

FULL LIST OF RATING ACTIONS

Fitch currently rates Marriott as follows:

Marriott International, Inc.

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2';

--Senior unsecured credit facility at 'BBB';

--Senior unsecured notes at 'BBB'.

Marriott RHG Acquisition B.V.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook is Positive.

Fitch has assigned the following ratings:

--Senior unsecured notes due 2022 at 'BBB';

--Senior unsecured notes due 2026 at 'BBB'.

Date of Relevant Committee: Nov. 16, 2015.

Additional information is available at www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005687

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160607006472/en/

Fitch Ratings
Primary Analyst
Stephen Boyd, CFA
Senior Director
+1-212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA
Managing Director
+1-212-908-9113
or
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Michael Weaver
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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