Aug. 5 (Bloomberg) -- At a time when bond buyers are shunning junk, Hyatt Hotels Corp. and Farallon Capital Management LLC are trying to drum up financing for 13 all-inclusive beach resorts from Cabo San Lucas to Cancun with Latin America’s riskiest debt in three years.
Playa Resorts Holding BV, a joint venture between Hyatt and the $19.2 billion San Francisco-based hedge fund, is planning to raise $300 million of seven-year bonds that Moody’s Investors Service rates Caa1, or seven levels below investment grade. If completed, the sale would be the first of such a low-rated corporate dollar bond in the region since now-defunct Brazilian meatpacker Independencia SA issued debt in 2010.
While Hyatt Chief Executive Officer Mark Hoplamazian promised “significant renovations” to the beachfront hotels that can charge upwards of $6,000 a night for their most expensive rooms, Moody’s Investors Service says Playa faces “intense competition” that could impair its ability to become more creditworthy. With similar-rated emerging-market corporate debt yielding an average 17.6 percent and junk issuers shut out of the market since May, Playa may have to offer a 15 percent yield to lure buyers, according to Western Asset Management Co.
“I would be surprised if they were successful at placing the issue,” Robert Abad, who helps oversee $51 billion at Western Asset in Pasadena, California, said in an e-mail. “There are very few single-B credits that can come to market during boom cycles let along during periods of market duress. So at the outset, it begs the question why a CCC rated issuer would try to come to the market under current conditions.”
At 15 percent, the yield would be the highest for a new issue since Independencia’s $165 million offering three years ago. Standard & Poor’s rates Playa Resorts’ notes B, two levels higher than Moody’s rating.
Playa Resorts didn’t reply to telephone calls and e-mails seeking comment. Katrina Allen, an external spokeswoman for Farallon, declined to comment on the bond sale.
“Playa has been operating in the all-inclusive segment for many years and has a strong management team,” Hyatt spokeswoman Katie Rackoff said in an e-mail. “Hyatt is delighted to be entering a new, rapidly growing all-inclusive segment with a transaction that will allow us to provide Hyatt’s authentic hospitality to a new guest base.”
Based in Amsterdam, Playa Resorts is a wholly owned subsidiary of Playa Hotels & Resorts BV, a hotel owner and operator that through a leveraged finance transaction is adding hotels in Mexico and the Caribbean. After the transaction closes, Playa will own 13 hotels and 5,805 rooms located in Mexico, the Dominican Republic and Jamaica.
Hyatt, controlled by the Pritzker family, will have a 42 percent stake in the company, with Farallon owning 37 percent and other shareholders with 22 percent, according to offering documents obtained by Bloomberg.
“Now is a good time to expand our resort presence given limited new supply and demographic evolution that should translate into higher levels of resort demand in the years ahead,” Hoplamazian said on a conference call with investors July 31.
Playa Resorts hired Bank of America Corp. and Deutsche Bank AG to sell the securities, which are callable after three years, said a person familiar with the transaction who asked not to be identified because terms aren’t set.
Bank of America spokeswoman Kerry McHugh and Deutsche Bank spokeswoman Mayura Hooper declined to comment on the bond sale.
“The ratings reflect the company’s small operating scale relative to global industry peers and its low geographic and segment diversification, which makes it vulnerable to economic cycles,” Moody’s said in a July 24 report. “The company’s high leverage, operation in a highly cyclical industry with intense competition, and no track record in the proposed business configuration could affect Playa’s ability to achieve its growth plan and improve its margins and credit metrics.”
The company’s adjusted debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, is about six times, according to Moody’s.
Playa Resorts is also raising $350 million through a secured term loan and $325 million from stake sales to Hyatt to finance the acquisitions and renovations.
“The ratings are a reflection of the high risk implied in this deal,” Rafael Elias, a director of emerging-markets trading at Credit Agricole SA in New York, said in a note to clients. “So the risks involved are way too high for me to consider at almost any price. I can tell you that if I were to tell granny to look at this deal and she did, she would chase me with her walker and would throw her false teeth at me in anger. So I won’t even mention it to her.”
No junk-rated Latin American company has sold bonds since department store operator Grupo Famsa SAB sold $250 million of seven-year bonds to yield 7.375 percent in May. That company is rated B+ by Fitch Ratings, four levels below investment grade, and B by Standard & Poor’s.
Hyatt is the latest company to try to capitalize on Mexico’s tourism industry. Starwood Hotels, owner of the St. Regis, Sheraton and Westin brands, plans to boost its Mexico portfolio by 30 percent with the opening of four hotels in the next three years, the company said in a statement July 19.
Eduardo Cortes, who helps manage $1.4 billion in debt at GIA Partners LLC, said investors in Playa Resorts will benefit from Mexico’s growing travel industry.
“I like Mexico and I like the sector,” Cortes said in a telephone interview from New York. Mexico “will slowly begin to attract international tourism and domestic travel.”
The extra yield investors demand to own Mexican government bonds instead of Treasuries fell three basis points, or 0.03 percentage point, to 197 basis points at 11:34 a.m. in New York, according to JPMorgan Chase & Co. index data.
Mexico’s five-year credit default swaps, contracts protecting holders of the nation’s debt from non-payment, increased one basis point to 123 basis points, according to data compiled by Bloomberg. The peso slipped 0.2 percent to 12.6884 per U.S. dollar.
S&P said its B rating reflects its assessment of Playa Resorts’ financial risk as “highly leveraged,” according to a July 24 report.
Emerging-market corporate bonds rated B yield 9.19 percent, according to Credit Suisse.
“The ratings optics, bond structure, corporate metrics don’t offer investors any comfort even at an aggressive yield,” Western Asset’s Abad said.
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