Fitch Affirms Marriott at ''; Resolves Rating Watch Negative

(The following statement was released by the rating agency) Fitch Ratings-New York-April 21: Fitch has resolved the Rating Watch Negative (RWN) for Marriott and has affirmed the Long-Term (LT) Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB-'. Fitch also affirmed Marriott's Short-Term F3 ratings. The Rating Outlook is Negative. Marriott's improved near-term liquidity position from a $1.6 billion unsecured bond issuance, as well as its recently announced bank credit facility leverage test covenant relief through March 31, 2021, are key factors supporting the RWN resolution. The length and severity of the coronavirus pandemic on global travel and hospitality demand will be key considerations in stabilizing the ratings. These factors include the degree and duration of lower hotel occupancy and average daily room (ADR) rates due to travel reductions; the ramifications for U.S. GDP and private non-residential fixed investment, which is a key driver of hospitality demand, and the direct impact on Marriott's global rooms system. Lodging faces immediate risk from severe drops in travel due to coronavirus fears, as well as the medium-term impact from slower, or negative economic growth on the global hotel industry. Globally, the virus' impact on hospitality could worsen depending on the pandemic's duration and if travel bans are extended or broadened. Fitch expects the abrupt halt to travel and economic disruption due to the coronavirus pandemic to result in a faster and deeper decline in U.S. lodging industry fundamentals compared with the downturns following the global financial crisis (GFC) and Sept. 11, 2001 terrorist attacks. Fitch's rating case assumes U.S. lodging occupancy rates drop to roughly 40% in March and 20% in April and May before improving to the 40% to 50% range through the balance of the year. These assumptions result in RevPAR declining by 44% during 2020. Fitch assumes 2021 RevPAR rebounds by 44%, which is roughly 80% of 2019 levels, reflecting marked improvement from the unsustainably low travel levels caused by coronavirus concerns, balanced by lingering U.S. economic weakness. Fitch's rating case also assumes a slightly weaker slope of RevPAR recovery during 2022 and 2023, roughly 7% per year, compared with the average of the prior two downturns. This reflects the potential for lingering travel concerns and more isolated periodic coronavirus outbreaks. Fitch's rating case assumptions result in TTM RevPAR returning to prior peak levels within 61 months, compared with 49 months and 59 months following the 2001 and GFC downturns, respectively. Fitch expects Marriott's leverage to increase to 6.1x and 3.7x during 2020 and 2021, respectively, under this scenario. Key Rating Drivers Market-Leading Position: Marriott is the largest global franchisor, manager and licensor of hotel, residential, and timeshare properties, operating a portfolio of 30 brands in more than 125 countries and territories. Marriott's worldwide rooms system is over 20% larger than its nearest competitor at 1.4 million rooms, providing meaningful scale economies and purchasing and bargaining power with suppliers and brand licensing partners. The company has the largest customer rewards system in the industry, providing high customer loyalty and repeat business. The company's scale advantages and customer loyalty have contributed to outsized franchisee market share gains. For example, Marriott's portfolio of brands comprised 34% of U.S. hotel rooms under construction, compared with its 16% share of existing and recently completed rooms, according to STR Global, Inc. Globally Diversified: Marriott has a globally diversified rooms system throughout most key developed and advanced emerging markets. North America comprised 71% of the company's segment profits (excluding reimbursed costs and before unallocated corporate overhead) during 2019, with the remaining 29% attributable to its Asia Pacific (13%) and Other International (16%) segments. Marriott further divides its North American operations by full-service hotels (57% of North America) and limited service (43%). Marriott also has moderate revenue diversity through its brand licensing portfolio. These recurring, high margin fees from long-term contracts with credit card, residential and timeshare companies comprised 14% of revenues (excluding reimbursed costs) during 2019, and are less susceptible to lodging industry cyclicality. Granular Brand Portfolio: Marriott's 30-brand portfolio covers the full spectrum of hotel room amenities and price points, except for the lowest economy price tier. The company has 30 brands with more than 10,000 rooms, which Fitch views as a key threshold delineating global brand competitiveness. Marriott has primarily grown its brand portfolio through acquisitions during the last decade, including its transformative 2016 acquisition of competitor Starwood Hotels Resorts, Inc. The company has also made tactical purchases to enhance its geographic and product depth. During 2019, the company acquired Elegant Hotels Group plc for $191 million (including the assumption of $63 million of debt) to enhance its presence in the all-inclusive resort segment. Other examples include the 2012 acquisition of group destination resort brand Gaylord Hotel, the 2014 Protea Hospitality Group acquisition that bolstered its presence in Africa and the 2015 acquisition of Delta Hotels Resorts, a full-service brand with a strong competitive position in Canada. Capital-Light Business Model: The ratings consider Marriott's long-term focus on a capital-efficient, asset-light, recurring-fee business model. Fitch estimates that the large majority of Marriott's operating profit is generated from management and franchise fees, and to a lesser extent brand licensing revenues from third-party timeshare and credit card operators. Leverage Temporarily Above Targets: Fitch expects Marriott to operate with total adjusted debt/operating EBITDAR leverage at approximately 3.25x through the cycle, notwithstanding the near-term increase to the low-6.0x range during 2020. The company has publicly committed to managing leverage to within 3.0x to 3.5x range, which Fitch views as consistent with a 'BBB' rating, based on its industry-leading market position and scale, and capital-light, recurring-fee-based operating model. Marriott has a long track record of strict financial policy adherence, with only modest, temporary deviations for strategic acquisitions. Fitch's ratings have tolerance for Marriott's lease-adjusted gross debt/EBITDAR leverage to temporarily increase above 4.0x, assuming the company provides a credible plan to bring leverage back to the mid-to-high 3.0x range in the one-to-two year Rating Outlook horizon. Derivation Summary Marriott is the largest global lodging brand owner/operator, with a highly competitive and widely diversified brand portfolio. Marriott's brand portfolio and global rooms system is larger and more geographically diversified than its peer, Accor (BBB-/Negative). The capital-light, recurring franchise and management fee business model reduces cash flow volatility relative to hotel owners like Host Hotels Resorts, Inc. (BBB-/Stable) due to lower operating leverage and minimal recurring capex needs. The company's low-to-mid 3.0x adjusted gross debt/EBITDAR leverage policy is above the mid-to-high 2.0x range for higher, 'BBB+' rated industrial corporate issuers with comparable service oriented, capital-light business models. Key Assumptions Fitch's Key Assumptions Within Its Rating Case For The Issuer Include: - U.S. RevPAR drops by 44% during 2020, partially rebounds by 44% during 2021 and steadily recovers by 7% during the balance of the rating case through 2023; - EBITDA falls by roughly 50% during 2020, with margins steadily improving to the low 60% range through 2023; - Marriott gradually reintroduces a common dividend in second-half 2021 and share repurchases during 2022 as cash flow recovers and leverage returns to the company's mid-3.0x policy target range. RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - Stabilization and improvement in global lodging fundamentals; - Leverage sustaining below 3.5x; - A reduction in Fitch's expectations for Marriott's through-the-cycle cash flow volatility; - EBITDAR/gross interest expense + rent above 3.0x. Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - Leverage sustaining above 4.0x; - EBITDAR/gross interest expense + rent below 2.0x; - Deterioration in Marriott's liquidity profile and capital access; - Sustained weakness and/or increased volatility in global lodging fundamentals. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit Link Liquidity and Debt Structure Marriott's liquidity position has deteriorated due to the sharp falloff in cash flow. Fitch's rating case assumes Marriott's EBITDA drops by roughly 50% and that FCF is slightly positive during 2020, aided by the swift and aggressive actions the company has taken to bolster liquidity. Marriott has suspended share repurchases, as well as its common dividend until operating fundamentals improve. Moreover, Fitch's rating case assumes the company reduces corporate overhead by 15% and capex spending by 33% to $500 million from initial guidance of $700 million to $800 million during 2020. However, Marriott's cash flow could be further pressured if its hotel owner franchisees fail to reimburse the company for all, or part of its reimbursable expenses, such as labor, due to the steep drop in hotel property level cash flows. The company is taking a variety of actions to reduce property level expenses for its owners to alleviate their cash flow pressure in the current weak environment. Examples include closing food and beverage outlets, reducing staff and closing floors or even entire hotels. The company has also temporarily deferred most brand standards to help owners and franchisees, including delaying renovations due in 2020 by one year, deferring required furniture, fixtures and equipment funding and suspending brand standard audits. The company faces several near-term liquidity challenges during the balance of 2020, including CP maturities and $900 million of unsecured bond maturities during fourth-quarter 2020. Marriott has fully drawn on its $4.5 billion committed revolver (matures June 28, 2024) to build liquidity and to repay short-term borrowings due to CP market volatility. The facility does not contain a material adverse change (MAC) clause, but it contains a single financial covenant that limits Marriott's maximum leverage (adjusted total debt/EBITDA) to not more than 4.0x. Marriott recently announced that its lenders will waive the leverage maintenance test covenant through March 31, 2021. The company may have some off-market options to bolster liquidity, which Fitch has not factored into its rating case. For example, Marriott may be able to "pre-sell" rewards points to its branded credit-card company partners at a discounted rate, and or pull forward renewal agreements. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Marriott International, Inc. has an ESG relevance score of 4 for Customer Welfare - Fair Messaging, Privacy Data Security and Labor Relations Practices due to limited labor disputes with workers primarily in California and data breaches. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit Link Marriott International, Inc.; Long Term Issuer Default Rating; Affirmed; BBB-; RO:Neg ; Short Term Issuer Default Rating; Affirmed; F3; RW: Off ----senior unsecured; Long Term Rating; Affirmed; BBB-; RW: Off ----senior unsecured; Short Term Rating; Affirmed; F3; RW: Off Starwood Hotels Long Term Issuer Default Rating; Affirmed; BBB-; RO:Neg ----senior unsecured; Long Term Rating; Affirmed; BBB-; RW: Off Contacts: Primary Rating Analyst Stephen Boyd, CFA Senior Director +1 212 908 9153 Fitch Ratings, Inc. 33 Whitehall Street New York 10004 Secondary Rating Analyst Roger Miller, Associate Director +1 646 582 4972 Committee Chairperson Michael Paladino, Managing Director +1 212 908 9113 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: Additional information is available on Link Applicable Criteria Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity) Link Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) Link Short-Term Ratings Criteria (pub. 06 Mar 2020) Link Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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