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Fitch Rates Expedia's Announced Senior Unsecured Notes 'BBB-'
September 18, 2017 / 1:14 PM / a month ago

Fitch Rates Expedia's Announced Senior Unsecured Notes 'BBB-'

(The following statement was released by the rating agency) NEW YORK, September 18 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Expedia, Inc.'s (Expedia) announced issuance of senior unsecured notes. A full list of ratings follows at the end of this release. Expedia plans to use the note proceeds for general corporate purposes, which may include the repayment of $500 million senior unsecured notes due 2018, working capital, capital expenditures, acquisitions, and shareholder returns. Fitch calculates pro forma leverage slightly above 2.0x, net of the 2018 maturity, which is marginally higher than 1.9x as of June 30, 2017. Fitch forecasts Expedia to de-lever back below 2.0x within a 12-month horizon. Expedia has an established track record of temporarily exceeding 2.0x and de-levering back below within a reasonable time period, which the current ratings have some tolerance for. KEY RATING DRIVERS Solid Credit Profile: Expedia's ratings reflect its strong competitive position and reasonably conservative balance sheet, offset by event risk concerns. The company has significant exposure to economic cyclicality through its impact on travel demand, which is countered by strong secular growth trends as an increasing mix of travel reservations are made through online travel agents (OTAs). Metrics Should Remain Consistent: Fitch expects leverage, 1.9x at June 2017, to remain at or below 2.0x in the long term through EBITDA growth. The company has a proven track record of delevering following acquisition integrations. Fitch believes Expedia's annual free cash flow (FCF) will grow to exceed $1.5 billion by 2020, driven by strength in the Core OTA business and HomeAway's transition towards more of an online booking platform. Competitive Landscape Supports Conservativism: Fitch expects Expedia will remain a moderately leveraged credit, while the competitive landscape and changing technology trends of the OTA market blur the lines among travel service providers. TripAdvisor, Inc., Airbnb, Google, and the ability of hotels to compete effectively for direct bookings are considerable long-term threats. Sizable Working Capital Deficit: Over half of Expedia's revenues are generated under a merchant model and the company's continued growth has yielded a working capital deficit of $6.4 billion as of June 30, 2017. This deficit could become a drain on cash in a downturn scenario, but Expedia has historically kept sizeable cash balances and revolver availability as sources of liquidity to mostly offset this balance. Liberty Overhang: Liberty Expedia retains a 54% voting stake in Expedia and voting control of this stake is held by Barry Diller through an irrevocable proxy. In the event that Expedia pursued a debt-financed repurchase of the remaining Liberty stake, it could be difficult for the company to retain its investment-grade rating and/or a Stable Outlook, depending on the amount of headroom relative to Fitch's 2.0x leverage sensitivity. DERIVATION SUMMARY Expedia's 'BBB-' Issuer Default Rating (IDR) reflects its solid credit profile and reasonably conservative balance sheet, offset by ongoing competitive pressures and event risk concerns. The company has significant exposure to economic cyclicality through its impact on travel demand. However, this is countered by the secular tailwinds as an increasing mix of travel reservations are being made through OTAs. Expedia's credit profile is considered weaker than peer The Priceline Group, Inc. due to lower margins and FCF generation, less stable cash flows in a downturn due to its higher mix of merchant model, and Expedia's exposure to event risk vis-a-vis Liberty Expedia's controlling stake. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Strong revenue growth in the double-digit range driven by primarily by organic growth. --EBITDA margins hold steady around 17% through leveraging of fixed costs on aggressive revenue growth offset by the levels of investments in sales and marketing expense that support a longer-term view. --Major uses of cash during the forecast period are funded with a mix of operating cash flow and additional debt raised as the company maintains gross leverage metrics at or below 2.0x. --Cash uses include $500 million in maturities in 2018 and $700 million - $900 million in new headquarters capex spending during 2016-2019. --FCF generation increases from $665 million in 2016 to $1.6 billion by 2020 due to EBITDA growth and as spending on new headquarters winds down. --$400 million-$500 million in annual bolt-on acquisitions and strategic investments (ex. Traveloka). --Capital returned to shareholders includes $160 million-$180 million in annual dividends and $500 million in annual share repurchases. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Positive rating action will likely be forestalled for the foreseeable future due to minimal business considerations to support the company maintaining a rating above 'BBB-' and certain secular challenges. These include an intensifying competitive environment, shifting consumer behaviors, and technological shifts. However, a more conservative financial profile coupled with increased revenue diversification from the growth of the Egencia segment and Ad and Media revenues could have positive implications for the rating. Additionally, the elimination of Liberty Expedia's controlling stake in a manner that is not detrimental to the credit profile would support positive momentum. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --An increase in expected volatility in profitability, potentially due to greater volatility in travel services demand or a higher fixed-cost component to Expedia's financial model; --A secular decline or deterioration in the OTA business model, potentially the result of a shift to direct bookings with travel providers; --A more aggressive financial policy, reflected through material debt-funded acquisition, share repurchase, or dividends that drive leverage sustainably above 2.0x. LIQUIDITY Solid Liquidity Profile: At June 30, 2017, Expedia had $2.9 billion in cash, $906 million in short-term investments, and generated $1.3 billion in Fitch-defined FCF during the latest 12 months (LTM) period. With FCF expected to grow to $1.6 billion by 2020 and the Orbitz/HomeAway acquisitions complete, Fitch believes Expedia will resume capital returns to shareholders at a pace similar to 2014 while maintaining leverage around 2.0x or below. Dividends should continue to grow at a consistent pace, and Fitch assumes $500 million in annual share repurchases. If operating performance weakens, Fitch expects Expedia would consider reallocating capital from share repurchases to debt reduction in an effort to remain within the current rating. FULL LIST OF RATING ACTIONS Fitch currently rates Expedia as follows: Expedia, Inc. --IDR 'BBB-', Stable Outlook; --Senior unsecured credit facility 'BBB-'; --$500 million in 7.456% senior unsecured notes due 2018 'BBB-'; --$750 million in 5.95% senior unsecured notes due 2020 'BBB-'; --EUR650 million in 2.5% senior unsecured notes due 2022 'BBB-'; --$500 million in 4.5% senior unsecured notes due 2024 'BBB-'; --$750 million in 5% senior unsecured notes due 2026 'BBB-'. Contact: Primary Analyst Colin A. Mansfield, CFA Director +1-212-908-0899 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Stephen Boyd, CFA Senior Director +1-212-908-9153 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Date of Relevant Rating Committee: Aug. 11, 2017 Summary of Financial Statement Adjustments Fitch does not make any material adjustments not already made by management. 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. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Solicitation Status here#solicitation 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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