S&P: NH Hotel Group's New EUR285 Million Senior Secured Notes Rated 'BB-'; 'B' Long-Term Rating Affirmed
At the same time, we assigned our 'BB-' issue rating to the group's launched €285 million senior secured notes. We assigned a recovery rating of '1' to the notes, indicating our expectation of very high (90%-100%) recovery prospects in the event of a payment default. We affirmed our 'BB-' issue rating on NH's existing senior secured notes. The '1' recovery rating on the notes remains unchanged.
The affirmation follows NH's launch of a €285 million senior secured bond to partly refinance existing debt. At the same time, we understand NH is putting in place a new €250 million revolving credit facility (RCF), which strengthens its liquidity. We continue to assess the group's liquidity as adequate, however. Before the RCF, NH relied significantly on asset sales, which we viewed unfavorably for liquidity purposes. In addition, NH's maturity profile will be extended with the notes and refinancing. We view the transaction as largely neutral for the group's leverage.
For our latest rationale covering the ratings on NH, including our assessment of its liquidity, please see "NH Hotel Group Upgraded To 'B' On Improved Operating Performance And Now Adequate Liquidity; Outlook Stable," published Aug. 1, 2016, on RatingsDirect.
The stable outlook reflects our view that NH will continue to focus on improving its operating performance, while controlling working-capital, liquidity, capex, and cost management. This, coupled with our expectations of improving profitability and gradual debt reduction, should continue to strengthen the group's credit metrics over the next 12 months. Specifically, we expect NH will post adjusted EBITDA interest coverage above 2x in 2016 and start generating positive free operating cash (FOCF) flow in 2017.
We could lower the ratings if NH's operating performance deteriorates due to macroeconomic or geopolitical event risks, or competition. In this scenario, a significant profit decline could weaken cash flow, leading to a constrained liquidity, covenant cushion below 15% or adjusted EBITDA interest going below 1.5x. We could also take a negative rating action if the group distributes dividends that are higher than we currently anticipate, undertakes debt-financed acquisitions, or posts significant negative (FOCF).
An upgrade of NH is unlikely over the next 12 months. Over the long term, we could raise the ratings if NH's credit metrics and financial policy support a revision of its financial risk profile to aggressive. This could occur if the group sustained a ratio of total adjusted debt to EBITDA of less than 5x and a ratio of funds from operations to total adjusted debt above 12%. In addition, a potential upgrade would follow positive FOCF generation on a sustainable basis and greater stability at the group's shareholder level.