(UPDATE: Press release provided by Standard & Poor's)
October 8, 2001
NEW YORK, NY -- Standard & Poor's Friday revised its outlook for Four Season Hotels Inc. (NYSE:FS) to negative
from stable.
At the same time, Standard & Poor's affirmed its triple-'B'-minus corporate credit and senior unsecured debt
ratings and the double-'B'-plus subordinated debt ratings on the company.
The outlook revision follows the Toronto-based company's announcement today that it will use a portion of its excess
cash balances to redeem its C$100 million debentures due July 2002 and that, in addition, the Toronto Stock Exchange
has accepted the company's notice of intention to make normal course purchases of up to about 1.5 million Limited
Voting Shares.
Under Toronto Stock Exchange rules, Four Seasons cannot repurchase more than 2% of its shares in any one month,
or more than 5% over a 12-month period.
Under these restrictions, Four Seasons could purchase up to C$94 million in stock over the next 12 months, based
on today's stock price.
Given the uncertainty of the current lodging environment, Standard & Poor's views potential share repurchases
in an unfavorable light; even though the company would likely have excess cash balances if it were to purchase
the maximum number of shares allowable under stock exchange rules.
The shock of the Sept. 11, 2001, terrorist attacks in the U.S. has had an unprecedented negative effect on lodging
demand in the U.S., and to a lesser extent, internationally.
The substantial near-term uncertainty supports the outlook revision in light of the announced share-repurchase
program.
Ratings for Four Seasons reflect its leading position in the luxury hotel segment, its well-recognized premium
brand, its ability to attract capital to the brand, and the historically stable nature of its management-fee income
stream, current operating environment notwithstanding.
Four Seasons operates 51 luxury hotels in 22 countries under the Four Seasons and Regent brand names.
Aside from a few remaining leasehold interests, Four Seasons is essentially a hotel management company.
Hotel management is a high-margin, low-capital-intensive business that generates relatively stable cash flows exceeding
operating needs.
Adding to this stability is the long-term nature of Four Seasons' contracts (averaging about 50 years), as well
as the non-disturbance provisions contained in a majority of the contracts, which protect the company in the event
of a sale or foreclosure.
While Four Seasons' cash flow base is small relative to that of other hotel management companies and its product
offerings narrow, geographic diversity and lack of asset concentration help mitigate regional downturns or other
potential risks.
Four Seasons has been expanding its international presence and entering new markets.
By doing so, it enhances cash flow diversification and further limits reliance on a particular region.
The company has 18 properties under construction.
Given its small hotel base, its growth plan is aggressive but manageable.
Small minority investments or loans to projects are periodically required, but most new capital to build these
properties comes from third parties, thereby limiting the company's real estate exposure.
In the near term, the effects of the Sept 11 terrorist attacks on the U.S. and the weaker economic conditions are
expected to have a material negative impact on Four Season's operating performance.
Despite this risk, Standard & Poor's believes that Four Season's liquidity position and modest debt levels
support the current ratings.
Following the redemption, debt balances are expected to be about C$170 million on a lease-adjusted basis. Given
the non-cash feature of its zero coupon convertible debt, Four Seasons debt service requirements are expected to
remain low.
For the 12 months ended June 30, 2001, Four Seasons reported total debt to EBITDA of 2 times (x) and EBTIDA to
interest expense of more than 6x.
OUTLOOK: NEGATIVE
The outlook reflects the difficult lodging climate. Significant near-term cash flow declines are built into Standard
& Poor's expectations, and liquidity could decline materially from current levels if the company completes
the maximum allowed amount of share repurchases.