Wachovia analyst sees Starwood credit profile improving by yearend

By Ronda Fears

Nashville, Tenn., Sept. 19 - Starwood Hotels and Resorts Worldwide Inc.'s credit profile will likely improve by yearend and that could boost the value of its convertibles, according to a report Thursday by convertible analyst Sri Nadesan at Wachovia Securities, Inc.

"Despite a tough environment for corporate travel and poor visibility for recovery, Starwood Hotels and Resorts is taking the right steps to strengthen its credit," Nadesan said in the report.

"Over the medium term, we expect the credit spread to tighten to about 650 bps, which if achieved could add more than a point to the convertible. However, if the United States takes military action against Iraq, it could temporarily cause a widening of Starwood Hotels and Resorts' credit spreads."

For now, however, the threat of imminent U.S. military action in the Middle East has apparently been postponed by Iraq's acceptance of inspections without conditions, the analyst said.

The Starwood 0% senior convertible bond due May 2021 was quoted at 50.125 versus a stock price of $24.29 on Wednesday. At these levels, the yield-to-put in May 2004 is 8.7% and the conversion premium is 102.4%. The implied credit spread is about 814 basis points, which Wachovia thinks is somewhat wider than warranted.

Currently Moody's and S&P have a negative outlook on Starwood but Nadesan said the expected improvement in credit metrics will likely help Starwood maintain its credit ratings despite the negative outlook.

"We believe it is likely that Starwood Hotels and Resorts could end the year with better credit statistics due to a combination of an expected debt paydown and better year-over-year comps for the second half of 2002, largely due to difficult third and fourth quarters of 2001 following Sept. 11, 2001," Nadesan said.

"Although Starwood Hotels and Resorts' debt-reduction program has been slow, the late July announcement of a partial sale of its CIGA assets for approximately €350 million should help the company pay down some debt by year-end. The cash proceeds of this sale are expected to be used to reduce debt by year-end.

"This willingness to reduce debt in the face of tough operating conditions will likely find favor among the rating agencies and could help Starwood Hotels and Resorts keep its current ratings."

At the end of the second quarter, Starwood had $1.39 million of debt coming due within a year. The company had cash and equivalents of $196 million and credit available in its domestic and international facilities of $467 million, for total liquidity of $663 million.

The company is currently negotiating with its banks to renew its credit facilities. At June 30, the company had $1.25 million of bank debt.

We believe the new bank facility could be $1.1 billion to $1.5 billion. The company has stated it expects to have its bank facilities renewed within the next few weeks.

The company hopes to generate EBITDA of $1.19 million-$1.21 million for fiscal 2002, which the analyst said means long-term debt to EBITDA could improve to 4.3x compared with 5.5x for the last 12 months at June 30 and 4.9x at the end of 2001. Interest coverage could also improve significantly to 3.4x at year-end from 2.8x for the last 12 months at June 30 and 3.1x at the end of fiscal 2001, he said.

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