June 9, 2017 / 7:23 PM / a year ago

Fitch Affirms Posadas' IDR at 'B'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, June 09 (Fitch) Fitch Ratings has affirmed Grupo Posadas, S.A.B. de C.V.'s (Posadas) ratings as follows: --Local and Foreign Long-Term Issuer Default Ratings (IDRs) at 'B'; --National Scale long-term rating at 'BB+(mex); --USD400 million senior notes due 2022 at 'B+/RR3'. The Rating Outlook is Stable Posadas' ratings are supported by the company's business position as a leading hotel chain in Mexico, solid brand equity, good operating performance and broad brand portfolio. The use of multiple hotel formats allows the company to target both domestic and international, business and tourist travellers from different income levels, diversifying its revenue base. Consistent product offering and presence in all major urban and costal locations in Mexico have resulted in occupancy levels that are above the industry average. Conversely, Fitch incorporates into Posadas' ratings its high leverage levels and the industry's high correlation to economic cycles, which negatively affect operating trends in downturns and increases volatility of operating results. The 'RR3' Recovery Rating assigned to the senior notes issuances indicates good recovery prospects given default. 'RR3' rated securities have characteristics consistent with historically recovering 51%-70% of current principal and related interest. KEY RATING DRIVERS Solid Business Position: Posadas' ratings are supported by the company's business position in Mexico, solid brand name and multiple hotel formats. The company's diversified revenues are generated from owned and leased properties, managed hotels and vacation club membership sales and annual fees. The ratings incorporate the industry's high correlation to economic cycles, which negatively affect operating trends in downturns and increases volatility of operating results. The use of multiple hotel formats allows the company to target domestic and international business travellers of different income levels, in addition to tourists, thus diversifying its revenue base. Geographic diversification is limited as Posadas' operations are primarily located in Mexico. Good Operating Performance: Consistent product offering and quality brand image have resulted in occupancy levels that are above the industry average in Mexico. Occupancy has been relatively stable for the past couple of years at around 65%, above the 2016 and 2015 year-end country averages of 60.3% and 59.6%, respectively. The company's diverse brand portfolio allows it to offer luxury, upscale, midscale, extended-stay and economy rooms nationwide. The change in sales mix, supported by robust market demand and the strength of the U.S.-dollar-denominated rates, has contributed to increased ADRs and, despite steady occupancy rates, resulted in year-over-year sales growth of 9.2% for the LTM ended March 2017. Cash Flow from Operations Supports Capex investments: Fitch expects capex levels to reach up to MXN1billion in 2017 and then decrease to MXN750 million for the next few years. Capex is mainly related to the Vacation Club project in Los Cabos as well as the remodelling of rooms. These investments are expected to be funded with internally generated cash flows, which will result in no additional debt for the company. Going forward, Fitch believes Posadas' strategy will continue to be focused on managed hotels, as opposed to owned hotels. Fitch estimates that the recently announced tax settlement payments will not have an adverse impact on Posadas' credit profile despite reducing the company's cash flow generation. The company has resolved all audits, fiscal credits and observations related to the fiscal years 2007 to 2013 in a conclusive manner. Posadas has agreed to pay MXN612 million in 2017, and annual payments of around MXN309 million from 2018-2023. Management has stated that payments will be covered by operating cash flows and should not affect projects and investment forecasts in the following years. FX Exposure: The company has a natural hedge to exchange rate risk in servicing its debt, since U.S. dollar revenues are used to cover USD31.5 million of interest expense annually. Around 25% of the company's revenues are denominated in USD, since their hotels in coastal destinations and some urban locations have rates in this currency. The remaining revenues are not directly denominated in USD, but increases in hotel daily rates tend to follow movements in the USD/MXN exchange rate. Fitch expects that the company will maintain around 30% of its cash and equivalents denominated in USD in the mid term. As of March 31, 2017 the company's USD cash balance was USD40.2 million and 100% of its debt balance was denominated in USD.. Fitch calculates that if prices were to remain unchanged, net leverage, measured as net debt/EBITDA, would increase from 3.2x to 3.3x. In 2015-2016 the impact of the Mexican peso depreciation on Posadas' leverage was partially offset by improved EBITDA margins, as a result of higher ADRs and occupancy levels, resulting in improved RevPAR as well as increased sales from the vacation club segment. Leverage Remains High: Fitch does not expect reductions in Posadas' outstanding debt balance; the slight strengthening of leverage ratios should come from improvements in EBITDA margins. Posadas increased its USD-denominated senior notes outstanding in mid-2016 to USD400 million from USD350 million after a reopening in May of that year. No further debt increases are expected, as the company deploys its growth strategy using primarily internally generated cash flows. Fitch expects higher EBITDA margins from an increase in the amount of managed hotels in the portfolio. Adjusted debt/EBITDA is expected to remain close to 5.0x in the short term, but improve to around 4.5x as EBITDA margins strengthen to above 20%. DERIVATION SUMMARY Posadas is the largest hotel operator in Mexico, with 155 hotels, resorts and vacation properties in its portfolio with about 24,714 rooms. The company's hotels are located in a mix of urban and costal destinations serving both leisure and business travellers, with approximately 83% of rooms located in urban destinations and 17% in costal destinations. Posadas owns only one hotel outside the Mexican territory; it is located in Laredo, Texas, and represents less than 1% of the available rooms. The company operates under multiple formats: owned, leased and managed hotels. Fitch estimates the total number of rooms will grow to around 30,000 by year end 2019. Less than 2% of these rooms will be incorporated as a wholly owned hotel. Posadas' development plan, focused mainly on managed hotels, will allow the company to keep capex levels low, as growth could be funded by third parties. Fitch estimates that cash flows generated by operations and cash on hand will be enough to cover maintenance capex and annual tax settlement payments. Posadas is well positioned in the domestic market in Mexico; its size and geographic diversification are smaller than global hotel operators; operating metrics are in line with industry players such as NH Hotel Group S.A. ('B'/Positive) although the latter has higher leverage (Dec. 2016 adjusted net debt/EBITDAR of 6.6x). Business models are different, since Posadas has migrated to an asset-light structure where strategic hotels are owned and growth is coming mostly from managed hotels, while NH leans more towards owning and leasing the properties. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for Posadas include: --Future growth focuses on managed properties, resulting in the portfolio mix moving away from owned and leased properties; --Sales for the vacation club segment increase from the addition of a new property; --Broadly stable operating indicators in the short- to medium-term; --EBITDA margins improve slightly based on the increase in managed properties; --Capital expenditures reflect pipeline of one owned hotel and recurring maintenance/remodelling Capex. --Tax settlement payments of MXN612 million paid in 2017 and MXN309 million paid from 2018-2023; --The company does not issue additional debt, gross leverage levels remain between 5.0x and 4.5x. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Stable EBITDA generation across cycles in conjunction with a strengthening in the margin. --Consolidating gains in operating indicators. --A proven track record of stronger and stable credit metrics, such as adjusted debt/EBITDAR consistently below 4.5x. --Strong liquidity in the form of robust cash balances complemented by available committed credit lines. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Weakening operating trends or decreases in RevPAR that could lead to lower EBITDA and cash flow levels. --Contingent liabilities that affect the issuer's ability to generate cash. --Cash outflows or incurring debt that result in adjusted debt/EBITDAR consistently higher than 5.0x. LIQUIDITY Liquidity is robust. The only debt maturity is the senior notes due in 2022. Cash balances as of March 31, 2017 were MXN1,982, before the MXN612 million payment related to the tax settlement. Cash and equivalents include a USD position worth USD40.2 million. As of March 31, 2017, the company has an unused committed secured credit line of MXN200 million, which provides additional support to liquidity. FULL LIST OF RATING ACTIONS Grupo Posadas, S.A.B. de C.V. -- Local and Foreign Long-Term IDRs at 'B'; -- National Scale Long-Term Rating at 'BB+(mex); -- USD400 million senior notes due 2022 at 'B+/RR3'. The Rating Outlook is Stable. Contact: Primary Analyst Diana Cantu Associate Director +52 81 8399 9100 Fitch Mexico, S.A. de C.V. Prol. Alfonso Reyes No.2612 Piso 8, Col. Del Paseo Residencial Monterrey, NL, 64920, Mexico Secondary Analyst Rogelio Gonzalez Director +52 81 8399 9100 Committee Chairperson Sergio Rodriguez, CFA Senior Director +52 81 8399 9100 Date of Relevant Rating Committee: June, 8, 2017. Summary of Financial Statement Adjustments Fitch adjusted the profits from asset sales to be reflected below the EBITDA line. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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