Moody's puts 5 lodging firms' ratings on review for possible downgrade

Moody's Investors Service on Wednesday put the ratings of Cendant Corp., Avis Group Holdings Inc., Hilton Hotels Corp., Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. on review for possible downgrade, reflecting the uncertainty concerning the future level of business and leisure travel following the attacks on the U.S. that occurred on Sept. 11. In this context, Moody's said it believes the cash flow of all lodging companies will be negatively impacted to varying degrees, and so the ratings of all lodging companies need to be reviewed in order to determine the appropriate individual rating actions.

Moody's said the events of Sept. 11 will further stress all hotel companies' debt protection measures, particularly given the slowing industry conditions that existed prior to the attack. The review will focus on assessing the level to which travel may drop due to the slowing economy, as well as the impact of how the attack may alter both business and leisure travel patterns over the intermediate term. It will also concentrate on the steps individual management teams will pursue to offset the negative impact on cash flow. Future financial policy will be an important rating factor in the review process, Moody;'s said. The rating agency said it would focus on heightened event risk associated with share repurchases given the sharp drop in the share price of most hotel companies. The review will also assess committed development projects, and the impact on cash flow of a slower ramp up once such projects are completed.

There is a concern that businesses may shift to more reliance on video conferencing, teleconferences or other means of communication in lieu of non-essential travel thereby reducing the base level of business trips going forward, Moody's said. This may be more pronounced in the short-run as business and leisure travelers defer travel altogether until the possible U.S. response to the terror attacks is known. Leisure travel may be less impacted relative to business travel as vacationers opt for more drive to holidays. This could offset the erosion of business travel, but perhaps at lower price points. So we would expect revenue per available room to be pressured both by lower occupancy and stagnant to falling room rates.

We expect the ratings of lodging companies with a high degree of hotel ownership will be more impacted due to the effects of negative leverage that causes EBITDA to drop by a higher multiple than the drop in revenue per available room. Companies were weakly positioned within their current rating category have less cushion to absorb the negative effects of the current industry environment, Moody's said. Those companies that pursue a management or franchise business model will not be as adversely affected since base fees are calculated off of gross revenues. However, incentive fees will drop as they are calculated off the hotel's operating profit. Managers and franchisors also tend to have more loan commitments and off-balance sheet liabilities. The loan commitments represent a future use of cash flow that is difficult or impossible to curtail, and off-balance sheet guarantees are more likely to become on-balance liabilities given the industry environment.

Among the ratings placed on review for possible downgrade were Cendant's senior unsecured debt at Baa1, Avis' senior subordinated debt at Baa3, Hilton's senior unsecured debt at Baa3 and senior subordinated debt at Ba1, Marriott's senior unsecured debt at Baa1and Starwood's guaranteed senior unsecured debt at Ba1.

Ratings confirmed with a revised outlook to negative, include Four Seasons' senior unsecured debt at Baa3 and subordinated debt at Ba1.

Fitch Comments on AOL Time Warner

The BBB+ rating level and outlook for AOL Time Warner remains stable, Fitch said Wednesday. While future credit protection measures are likely to be less than expected, Fitch's said it sees a stable outlook due to AOL's diversified revenue base, leading market position of major businesses, unparalleled brands, content and distribution network, ability to leverage infrastructure and business relationships to develop new revenue streams and overall flexibility in its credit protection measures. The tragic events of Sept. 11, which have resulted in short term as well as the potential long term loss of advertising revenues coupled with the increase in costs associated with additional resources in its news gathering operations clearly had an impact on AOL Time Warner and will cause the company to miss its previously stated financial targets of $40 billion in revenues and $11 billion in EBITDA for 2001. The company now expects to achieve full year 2001 EBITDA growth in the 20% range and revenue growth in the 5-7% range.

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