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Fitch Affirms Whitbread at 'BBB'; Assigns Bond 'BBB(EXP)'
May 14, 2015 / 8:57 AM / 2 years ago

Fitch Affirms Whitbread at 'BBB'; Assigns Bond 'BBB(EXP)'

(The following statement was released by the rating agency) LONDON, May 14 (Fitch) Fitch Ratings has affirmed Whitbread Plc's (Whitbread) Long-term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook and Short-Term rating at 'F2'. Fitch has also assigned Whitbread's GBP450m 2025 senior unsecured notes (assumed new issue size and tenor as at the date of publishing), to be issued by Whitbread Group plc (a 100% subsidiary of Whitbread Plc), an expected senior unsecured rating of 'BBB(EXP)'. The proceeds from the bond offering will be used for general corporate purposes, including capital expenditure. The final bond rating is contingent upon the receipt of final documents conforming to information already received. Whitbread's ratings are supported by its leading position in the less cyclical UK budget hotel business with its Premier Inn (PI) brand and its growing Costa Coffee shop network. We expect Whitbread's operating performance to remain positive thanks to the group's strong expansion strategy in its two core business units. However Whitbread's significant expansion capex is expected to increase leverage to and slightly above Fitch's leverage rating guideline. Fitch expects Whitbread's FFO lease and pension adjusted leverage at 3.6x by end 2016 and 2017. Fitch nevertheless regards the execution risk linked to expansion as moderate and leverage should recover to consistently lower levels, as improved profits flow through to positive free cash flow (FCF) by 2018. Rating headroom will nevertheless be tight for the next three years. KEY RATING DRIVERS FOR THE NOTES Unsecured Ranking The planned notes will rank pari passu with other unsecured obligations, and similar to existing senior unsecured obligations will benefit from cross-guarantees from major group subsidiaries and a negative pledge clause in relation to its ability to incur secured indebtedness on any listed or traded on any stock exchange or other regulated operating securities market. Limited Subordination from Pension Obligations The equalisation of the notes' rating with Whitbread's Long-term IDR of 'BBB' is supported by the absence of material prior ranking debt in the capital structure (both in absolute terms and relative to the profits of the group). Most of Whitbread's debt is unsecured and the only secured obligation relate to properties secured in favour of the Pension Scheme for GBP408m at FYE15. Fitch also notes that securities in favour of the Pension Scheme cannot exceed GBP500m. KEY RATING DRIVERS FOR THE IDR Leading UK Hospitality Business The rating reflects Whitbread's leading position in the less cyclical budget segment of the UK hospitality sector, with its PI brand and Costa coffee shop business. It benefits from a well-invested estate and business customers choosing less expensive hotels. The rating also reflects Whitbread's lack of meaningful geographical diversification outside the UK. Strong Trading Performance to Continue Whitbread continues to perform well, with PI benefiting from a recovering hotel market in the UK. Like-for-like group sales grew by 6.5% in the financial year to February 2015 (FYE15) driven by its strong brands, with an increase in underlying pre-tax profits of 18.5%. Fitch expects operating performance to remain positive in FY16, thanks to improved UK economic conditions, the group's hotel expansion strategy and Costa's strong growth and profit momentum in a developing sector. Freehold Expansion to Reduce FCF Whitbread is pursuing organic revenue growth at its hotels division and at Costa. The ongoing expansion will be achieved partly via freehold acquisitions, notably in London. Despite our projection of sustained revenue growth and improved EBITDA in FY16 (to March 2016), FCF should turn negative due to higher capex (GBP700m) and dividends. However, the rating affirmation and Stable outlook reflects our expectation of a gradual restoration of FCF from FY18, supported by EBITDA growth. Fitch estimates as moderate the execution risk linked to Whitbread's expansion strategy on the back of the group's well-executed to date expansion strategy. Tight Rating Headroom Fitch acknowledges that Whitbread's profitability and financial flexibility remain strong for the rating. However Fitch expects some pressure on credit metrics with FFO lease-pension adjusted leverage at 3.6x at FYE16 and FYE17 due to high capex, despite projected GBP100m annual asset divestments. Moreover we expect room expansion in London to benefit operating margins through higher prices, which should result in FFO growth and allow deleveraging to close or below 3.5x leverage from FY18. This should compensate for any margin dilution from expansion, particularly in the international business. Whitbread has also restated its commitment to its investment-grade rating with lease and pension adjusted net debt/EBITDAR ratio below 3.5x. Whitbread retains the flexibility to reduce its freehold investments and cut dividends should leverage increase beyond levels compatible with the rating. Pension Deficit Reduction Continues The ratings capture the high annual cash pension contributions needed to reduce the pension deficit, according to an agreed payment schedule with the Whitbread Pension Trustees. The deficit recovery plan implies a cash contribution of around GBP75m per year on average stretching up to 2022. At FYE15, the pension deficit at GBP554m was higher than at FYE14 (GBP534m) due to lower liability discount rates and members' improved life expectancy. Fitch includes the pension deficit in the calculation of adjusted leverage ratios. Whitbread adjusted leverage ratios include on average 0.5x additional leverage due to pension deficit. KEY ASSUMPTIONS - Group's revenue growth in the next three years driven by hotel expansion and relatively moderate like-for-like sales growth, with stable occupancy and moderate average room rate (ARR) rises. - ARR increasing above inflation from 2015/16, reflecting some ability to increase prices to UK middle market consumers. - Occupancy to remain relatively stable. - Rents based on management case. - Capex to GBP700m in FY16 gradually declining thereafter partly funded by planned bond offering. - Pension deficit funding contributions agreed with the trustees of on average GBP75m p.a. to FY18, - Asset divestments of around GBP100m in FY16. RATING SENSITIVITIES Positive: The ratings remain constrained by Whitbread's low degree of business diversification outside of PI and Costa in the UK. However future developments that could lead to positive rating action include: - Material geographic diversification outside of the UK along with continuing improvement in trading leading to an EBIT margin sustainably above 20% - Lease-adjusted EBITDAR/ interest plus rents ratio above 4.0x or FFO fixed charge cover above 3.5x. - Reducing leverage, with Fitch lease and pension-adjusted debt/EBITDARP below 2.5x and Fitch lease and pension-adjusted FFO gross leverage below 3.0x. - Sustained positive FCF. Negative: Future developments that could lead to negative rating action include: - Deterioration in core businesses and/or over-expansion leading to EBIT margin sustainably below 15% combined with a sustained and permanent contraction in the company's FCF generation. - The above leading to lease-adjusted EBITDAR/interest plus rents ratio to below 3x or FFO fixed charge cover below 2.5x on a sustained basis. - Significantly rising leverage, with Fitch lease and pension-adjusted adjusted net debt/EBITDARP sustained above 3.5x and Fitch lease and pension-adjusted FFO leverage trending towards 4.0x, on a sustained basis. Contact: Principal Analyst Kalthoum Sammari Associate Director +33 144 29 91 85 Supervisory Analyst Jean-Pierre Husband Director +44 203 530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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