Rating Action: Moody's rates Choice Hotel's unsecured notes Baa3
Global Credit Research - 09 Jul 2020
New York, July 09, 2020 -- Moody's Investors Service, ("Moody's") assigned a Baa3 rating to Choice Hotels International, Inc.'s ("Choice Hotels") planned $400 million senior unsecured note issuance. There is no change to the company's existing senior unsecured rating of Baa3 or its negative outlook. At the same time of the planned issuance, Choice Hotels is commencing a cash tender offer to purchase up to $160 million of its 5.75% senior unsecured notes due 2022 ($400 million currently outstanding).
The proceeds of the planned unsecured note issuance will be used in part to repay Choice Hotels' $250 million unsecured term loan (unrated) and to fund the purchase of the tendered 2022 notes. The company put in place the 364 day term loan facility to bolster its liquidity in April 2020 on a precautionary basis.
..Issuer: Choice Hotels International, Inc.
....Senior Unsecured Regular Bond/Debenture, Assigned Baa3
Choice Hotels' Baa3 credit profile benefits from its franchise centric business model which provides a relatively more stable earnings stream and lower capital expenditure requirements compared to lodging peers that own or lease a higher number of hotels. Choice is less reliant on business travel than some of its larger peers, which Moody's expect will recover at a slower rate than the leisure travel segment. The company also benefits from its multi-brand hotel portfolio, broad geographic diversity, and good liquidity. Choice Hotels operates under 13 brand names however it has a concentration in two brands, Comfort and Quality, which combined account for over 50% of its domestic hotel system. Choice Hotels' revenue and earnings are relatively modest versus its peers given it is a solely franchise business model. However, Moody's estimates that the company has the fifth largest hotel system in the world and its franchise base and hotel system of about 598,000 rooms is large.
The negative outlook reflects our expectation that travel restrictions being put in place across the US related to the spread of the COVID-19 coronavirus will put significant pressure on Choice Hotels' earnings in 2020. Assuming the second quarter of 2020 is the trough in terms of occupancy declines, the company's debt/EBITDA will remain within the downgrade trigger of 4.25x and the company has strong liquidity to get the company through this period of unprecedented declines in occupancy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Ratings could be downgraded if debt/EBITDA is sustained above 4.25x, EBITA/interest falls below 4.0x or if retained cash flow/net debt remained below 12%. Ratings could be upgraded if debt/EBITDA remains below 3.0x on a sustained basis, EBITA/interest expense remains above 6.0x and retained cash flow/net debt exceeds 25% on a sustained basis. A higher rating would also require a financial policy that supports credit metrics remaining at these levels.
Choice Hotels International, Inc. (Choice) franchises 7,145 hotels representing approximately 598,000 rooms in more than 40 countries and territories outside the US. The company operates brands in the midscale, economy, and upscale segments of the industry. Choice Hotels' brands include Comfort, Quality, Clarion, Clarion Pointe, and Sleep Inn, in the midscale segment; Cambria Hotels and Ascend Hotel Collection in upscale; Econo Lodge and Rodeway Inn in the economy segment, and WoodSpring Suites, MainStay Suites, Everhome Suites, and Suburban Extended Stay Hotel in the extended stay category. 2019 net revenues were approximately $540 million (excluding marketing and reservation fees).
The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Peter Trombetta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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