OREANDA-NEWS. Fitch Ratings says AccorHotels' (BBB-/Stable) announcement that it plans to turn HotelInvest into a separate legal subsidiary should have no immediate impact on its ratings. However, the eventual sale of a majority stake in HotelInvest could have significant rating implications. The final setup of the group as well as its financial structure and policy will be critical to ascertain the ultimate effect upon unsecured creditors at the holding level.

The creation of HotelInvest as a separate legal entity, to be completed in 1H17, will not change the current unencumbered asset coverage related to AccorHotels' unsecured bonds or trigger any acceleration clause based on the terms of AccorHotels' bonds. However, the planned partial sale of AccorHotels' shares in HotelInvest to third-party investors could eventually prompt us to reassess the group's underlying risk profile. For example, we may adjust the consolidated financial figures to derive a financial profile that best reflects the cash generation of the surviving group relative to its future debt service requirements.

We expected that large EMEA hotel groups would make further progress toward "asset-light" business models during 2016. Since 2013, AccorHotels has been reporting the group's performance under two distinct divisions. The HotelInvest division owns and leases 1,183 hotels and is yield-oriented. HotelServices is the hotel operator and brand franchisor within the group currently operating 3,940 hotels worldwide through management and franchise contracts. HotelServices' EBITDAR is widely diversified by geography, although we expect around 45% will be generated from Europe (2016 pro-forma following completion of the Fairmont acquisition).

The project to turn HotelInvest into a new legal entity will accelerate the group's "twin track" strategy, eventually shifting the risks and rewards associated with property ownership to investors with an appetite for real estate. AccorHotels will therefore adopt key elements of the less capital intensive, recurring fee-based business models that are common among US lodging groups. This will enable the group to pursue an operating model characterised by diversified sources of hospitality-related revenues with an emphasis on recurring fee income, reducing AccorHotels' cash flow volatility, capital intensity and exposure to expensive lease payments. Overall the group's evolving setup should allow AccorHotels to strengthen its leadership and optimise distribution costs against the backdrop of a rapidly consolidating lodging business.

The percentage of AccorHotels' shares in HotelInvest to be sold is yet to be determined. AccorHotels plans to use the cash proceeds to fund future growth at both HotelInvest and HotelServices. Fitch expects HotelServices will continue its expansion through acquisitions, organic growth and digital investments. The transaction should also increase the transparency of the value of AccorHotels' asset portfolio (reportedly worth over EUR7bn), but Fitch does not exclude the possibility that part of cash proceeds from the sale of AccorHotels' shares in HotelInvest may be used to return cash to shareholders. As a result, clarity of future capital structure considerations and the financial policy of the carved out entity and the remaining AccorHotels' business will be vital to ascertain the ratings trajectory.

Once HotelInvest completes its capital raising plans, this will offer AccorHotels a strong capacity to finance future investments while bringing HotelServices' strong cash flow generation to the fore. We estimate HotelServices generates free cash flow margin in the mid-teens, which would be consistent with close peers such as Marriott International, Inc and Starwood Hotels & Resorts Worldwide Inc. (both currently in merger talks and rated BBB/Positive).

From the bondholders' perspective, if AccorHotels were to own less than 50% of HotelInvest, it could prompt us to deconsolidate it from AccorHotels' consolidated financial figures, adding back the allocated share of any recurring dividends from HotelInvest. A potential deconsolidation of HotelInvest would also significantly reduce AccorHotels' lease expenses and hence lease adjustment on the group's total adjusted debt, as most of the group's current fixed and variable lease liabilities should stay within HotelInvest.

Following the completion of the Fairmont acquisition we expect AccorHotels will retain limited financial headroom for its 'BBB-' rating with pro-forma funds from operations (FFO) adjusted gross leverage of around 5x, lease-adjusted gross debt to EBITDAR of 4.7x, and FFO fixed charge cover of around 2x.

Fitch will monitor the timing of the contemplated creation of the new HotelInvest legal entity and fundraising plans. We expect AccorHotels' ratings to balance the group's ambitious growth strategy with its cash flow generation, its significant scale and the strength of its brands. Key rating drivers will include the company's financial strategy, the underlying hotel operation performance and continued progress with its digital investments.