Fitch Rates Wyndham's Proposed Notes Issuance 'BBB-'; Assigns Initial 'BBB-'
IDR; Outlook Stable
NEW YORK -- February 19, 2013
Fitch Ratings has assigned an initial 'BBB-' Issuer Default Rating (IDR) to
Wyndham Worldwide Corp. (Wyndham). Fitch has also assigned a rating of 'BBB-'
to Wyndham's proposed issuance of senior unsecured notes. The Rating Outlook
is Stable. A full list of rating actions follows at the end of the release.
Wyndham has announced that it will be issuing five- and 10-year senior
unsecured notes that rank pari passu with all existing notes and credit
facility. The proceeds will be used to repurchase existing debt and for
general corporate purposes. On Feb. 6, 2013, the company announced an any and
all tender offer of its 5.75% notes due 2018 and 7.375% notes due 2020. Fitch
expects today's issuance will be leverage neutral to Wyndham.
The ratings reflect Wyndham's strong free cash flow (FCF) profile, its focus
on an asset-light/fee-driven business model, strong market position in all of
its businesses, and management's public commitment to maintaining
investment-grade credit metrics.
Rating concerns include the company's high exposure to the more capital
intensive timeshare industry, cyclicality in the lodging and timeshare
businesses, material working capital swings, and leverage being managed at the
high-end of Fitch's target level for the given rating and business risks.
STRONG FREE CASH FLOW GENERATION
Since rightsizing its timeshare business in 2008, the company has generated
strong annual FCF. At year-end 2012, the company generated FCF (after
dividends) in the amount of $662 million, or roughly 25% of its total core
debt balance (excludes securitized debt). Fitch expects FCF/debt will remain
between 15% and 20% over the next few years, with most of the deterioration
coming from dividend increases.
Most of Wyndham's business is asset-light and fee-driven, with the exception
of vacation interval sales. Approximately 60% of total revenues are
fee-driven. Fitch's expectation is that management will continue to focus on
asset-light alternatives in the timeshare segment (e.g., Wyndham Asset
Affiliation Model [WAAM] and management fee revenue) in addition to
maintaining its current asset-light, fee-driven lodging and vacation exchange
and rentals models.
The ratings reflect the addition of owned properties, which will be used for
Wyndham's mixed use (lodging and timeshare) concept. Fitch expects the
company's main focus to be on the franchising of its hotel brands with the
mixed use concept comprising a small component of its overall strategy.
POSITIVE LODGING FUNDAMENTALS
Wyndham is primarily a franchisor of midscale and economy hotel brands in the
U.S. (roughly 80% of current room count is in the U.S.). U.S. demand trends
remain strong, although growth is moderating as the current lodging cycle
matures. Fitch expects weaker growth in 2013 with a conservative U.S. RevPAR
base case scenario of +4.5%. U.S. RevPAR grew 6.8% in 2012 and 8.2% in 2011,
according to Smith Travel.
Fitch expects Wyndham's RevPAR performance to be slightly below the industry
average at this stage of the lodging cycle, as hotels in the mid-to-lower end
segments generally have less pricing power than ones in the upper-scale
The industry is currently benefitting from high occupancy rates and low supply
growth, which is leading to greater pricing power. Fitch believes that supply
growth has reached a trough, with supply growing at only 0.5% in 2012.
However, Fitch expects U.S. supply growth will remain below 1% in 2013 and
well below its long-term historical average of 2% in 2014.
DIFFERENTIATED SEGMENT: EXCHANGE & RENTALS
The vacation exchange and rentals segment differs from the traditional
businesses of other high-profile lodging companies. Fitch views them as a
modest positive contributor to Wyndham's business profile risk. Vacation
exchange and rentals comprises roughly 30% of the company's revenue and EBITDA
and is almost entirely fee-driven, with the exception of a small portion of
owned/leased properties on the rentals side. This segment provides stability
to the business profile as it had less severe declines during the past
recession (-8.5%) compared to both the lodging and timeshare segments. In
addition, it has a fairly flexible cost structure allowing for easier cost
reductions during a downturn.
Scale is a significant barrier to entry in the vacation exchange industry
because a large amount of resorts are needed to make it an attractive
exchange. The industry is essentially a duopoly. Wyndham's vacation exchange,
RCI, has over 4,000 vacation ownership resorts and competes mostly with
Interval Leisure Group, Inc., which has approximately 2,700 resorts.
Near-term business risk is slightly elevated in Wyndham's rentals business due
to its exposure to Europe and its small ownership position in several assets.
However, it remains largely an attractive fee-for-service business that
complements its other business lines well. Wyndham maintains a strong and
growing competitive position, which should enable it to capitalize on
opportunities in the fragmented rentals industry. This may present some M&A
risk, but Fitch believes most acquisitions would be bolt-on rather than
transformative and asset heavy.
HIGH EXPOSURE TO TIMESHARE
Fitch generally views the timeshare industry less favorably than lodging.
Fitch estimates that roughly half of Wyndham's revenues and slightly less than
half of its EBITDA comes from timeshare operations. The industry is currently
in a stage where development spending is low compared to historical levels due
to the high supply growth and demand slowdown that occurred prior to and
during the past recession. Longer-term, cash flows for timeshare companies
will eventually become more volatile as higher development spending will be
needed to build new inventory.
Wyndham has reduced its cash flow volatility exposure by focusing on recurring
management fees as evidenced by its acquisition of Shell Vacations, which
mostly consists of already sold inventory. Wyndham also has implemented
alternative models that are less capital-intensive, such as WAAM. The WAAM
models allow Wyndham to either sell other developers' inventory into Wyndham's
timeshare network for a fee or buy inventory on nearly a just-in-time basis
once Wyndham has a subsequent buyer in place.
Fitch does not expect a significant ramp up in development spending over the
next few years. Rather, Fitch expects the company will continue to seek
asset-light alternatives in addition to modest inventory spending of roughly
$150 million annually as it works through existing inventory. Longer-term, the
ratings incorporate Fitch's assumption that inventory spending will ramp up
modestly, resulting in a continued solid FCF profile.
INCREASED CONTINGENT LIABILITIES
The ratings reflect increased contingent liabilities from its recent
management agreements with FelCor and Hospitality Properties Trust (HPT).
Fitch does not expect the company to deviate materially from its lodging
franchisor business model. However, Fitch recognizes the company may need to
enter into management agreements, which may increase contingencies through
performance guarantees, in order to grow its hotel supply and bolster the
competitive position of its more upscale hotel brands.
Such contingencies are factored into the ratings through an analysis of
Wyndham's liquidity position and the potential impact to increased leverage as
a result of having to fund some, or all, of the contingency amount.
Fitch recognizes the company has some common characteristics of an LBO
candidate, particularly a strong FCF profile, a historical valuation discount
to peers, and the potential perception of a misunderstood business model. This
risk is heightened in the current accommodative credit environment.
However, there are several mitigants, including change of control provisions
in its bond indentures, the company's competitors are largely investment grade
issuers, and there is limited leveragability on some of its businesses.
Wyndham's ample liquidity position is supported by $195 million of cash, $631
million of availability (less commercial paper and letters of credit) under
its corporate revolving credit facility, and $460 million of availability
under its two-year vacation ownership conduit facility as of Dec. 31, 2012.
Wyndham has a sizable and well-established consumer financing business related
to its timeshare business. Term securitization transactions of timeshare
receivables provide an additional source of liquidity and recent transaction
terms have been favorable. Market accessibility was better than Fitch's
expectations through the recent recession, although transaction terms were
much less favorable than the current financing environment.
The company's maturity schedule is favorable with no major maturities coming
due over the next four years. The company had $273 million in commercial paper
outstanding, as of Dec. 31, 2012.
The company will continue to have a negative drain on working capital from its
timeshare contract receivables. Fitch expects future changes in working
capital to be roughly negative $200-$250 million, with a slight uptick coming
from increased development spending on timeshare inventory.
SENSITIVITY/KEY RATING DRIVERS
--Fitch calculates year-end 2012 core lease-adjusted leverage of 3.35x. Fitch
believes this is at the higher-end of the range it expects Wyndham to manage
its balance sheet, though we expect leverage will remain around current levels
in the near term. Fitch's core lease-adjusted leverage target (excludes
securitized debt and consumer financial profit) for an IDR of 'BBB-/Stable
Outlook' is 3.25x, with a cap of 3.5x. There is little tolerance in the
current rating/outlook for leverage at or above 3.5x. Fitch allows for
leverage to be slightly above its target level at 'BBB-' due to its strong FCF
--Wyndham's current FCF/Debt ratio is 25%, which is very strong for the rating
category. If the company's FCF/debt deteriorated to below 15% without the
company reducing leverage to within 3.25x there would be negative pressure on
--Negative rating pressure could result if Fitch's outlook for development
spending and the capital intensity of the company's businesses were to
--There could be positive ratings momentum if the company reduced its leverage
and adopted more conservative financial policies. Fitch does not expect this
to occur in the near term, but upward rating momentum could ensue if core
lease-adjusted leverage were reduced to around 2.75x while maintaining a solid
FCF profile, and management instituted the policy to maintain leverage around
Fitch has assigned Wyndham the following ratings:
--Short-term IDR 'F3';
--Commercial paper 'F3';
--$1 billion senior unsecured credit facility 'BBB-';
--Senior unsecured notes 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency
Risk for U.S. Lodging C-Corps' (Jan. 7, 2011);
--'2013 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View' (Dec.
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk
for U.S. Lodging C-Corps
2013 Outlook: Cross-Sector Lodging & Timeshare -- The Penthouse View
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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Shawn Gannon, +1-212-908-0223
Fitch Ratings, Inc.
New York, NY 10004
Michael Paladino, CFA, +1-212-908-9113
Michael Simonton, CFA, +1-312-368-3138
Stefano Bravi, Milan, +39 02 879 087 1
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