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Press Release: Fitch Ratings
October 25, 2006
NEW YORK, NY -- Fitch Ratings has upgraded Starwood Hotels & Resorts Worldwide Inc.'s (NYSE:HOT) credit ratings
as follows:
-- Issuer Default Rating (IDR) to 'BBB-' from 'BB+'; -- Bank credit facility to 'BBB-' from 'BB+'; -- Senior unsecured notes to 'BBB-' from 'BB+'.
The ratings apply to roughly $2.5 billion of outstanding debt as of June 30. The Rating Outlook has been revised
to Stable from Positive as the likelihood for significant continued share repurchase activity and the potential
for strategic acquisitions are likely to limit further upside to Starwood's credit ratings over the next 12 months.
The upgrade is based on the company's continued execution on its plan to sell assets in order to improve its balance
sheet, its business mix reorganization and the continued strength of lodging fundamentals. The ratings reflect
Starwood's leading brands, high quality assets, substantial product and geographic diversification, and its solid
position in the timeshare business.
Potential credit quality deterioration could come from capital deployment decisions (a higher than expected level
of share repurchase or a heavily debt-financed acquisition) and contingent commitments such as loans and equity
contributions to partners, third-party guarantees and potential timeshare commitments. However, Fitch believes
Starwood's investment grade profile with its improved balance sheet and increased financial flexibility mitigates
these concerns and allows for some flexibility in credit metrics.
In April 2006, the company completed the sale of 33 properties to Host Hotels for $4.1 billion. Following that
transaction, Starwood improved its business mix as it significantly increased the amount of cash flow from its
managed/franchise business. The greater mix of fee business results in a more capital efficient company with stronger
margins, higher returns on capital, less cyclicality and increased financial flexibility.
Initial data points for the 2007 demand picture indicate the robust lodging operating environment should continue.
Earlier this month, initial outlooks for 2007 RevPAR growth were given by Marriott (+7% to +8%) and Host (+6% to
+8%). Marriott also indicated that it expects compound annual RevPAR growth of 4%-8% from 2007-2009; this outlook
allows for some continued slowdown beyond 2007 but is still a very healthy revenue environment for the industry
over the next few years. Given the additional backdrop of tame supply growth of 1%-2% over the next two-three years,
the lodging industry remains poised to perform well in an environment of low-single digit economic growth.
Due to the strong lodging operating environment and asset sales, Starwood has continued to improve its credit profile
and reduce leverage since Fitch changed the Rating Outlook to Positive in November 2005 following the announcement
of the asset sale to Host. From the beginning of 2005 to second quarter 2006, Starwood has sold 49 properties for
$4.9 billion (roughly $2 billion of which was in cash) and retained long-term management contracts on most of the
properties, thereby locking in a future cash flow stream.
As a result, LTM leverage (lease-adjusted debt to EBITDAR) as of June 30, 2006 has improved to 2.8 times (x) from
3.7x at the end of 2005 and 4.6x at the end of 2004. Debt has been reduced by more than $1.3 billion to $2.82 billion
as of June 30, 2006 from $4.15 billion as of Dec. 30, 2005. Much of the debt reduction in 2006 was a reduction
of secured debt, and Starwood plans to raise capital on an unsecured basis going forward. As a result, Starwood
has significantly increased its unencumbered asset base.
Starwood used much of the proceeds from the Host transaction earlier this year to repurchase shares. Over the next
couple of years Fitch believes Starwood will continue to be shareholder friendly with respect to share buybacks
and Starwood could consider potential strategic acquisitions. The current investment grade profile could be maintained
despite these potential leveraging transactions because Fitch believes that over the next 12 months-18 months Starwood
will continue to selectively sell owned hotel assets and in many cases retain long-term management contracts.
It should be noted that as a result of the improved balance sheet, reduction in secured debt robust operating environment
and solid cash flow generation ability, Starwood could be considered an attractive leveraged buyout (LBO) candidate
in a very active current LBO environment. Accordingly, if a transaction were to materialize, the absence a change
of control put and covenants limiting leverage in Starwood's bond indentures exposes bondholders to price risk
in the event of a leveraged transaction. However, the bonds do have covenants requiring that any security be shared
equally and ratably with the unsecured bonds, so that they are protected against secured debt coming ahead of them
in a leveraged transaction.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Contacts Fitch Ratings Michael Paladino, CFA, +1-212-908-9113 (New York) Bill Warlick, +1-312-368-3141 (Chicago) Brian Bertsch, +1-212-908-0549 (Media Relations, New York)
Source: Fitch Ratings