S&P CUTS PROMUS HOTEL CORP CREDIT RATING

Press Release: Standard & Poor's

June 22, 1999
Standard & Poor's today lowered its corporate credit and bank loan ratings for Promus Hotel Corp. to triple-'B' from triple-'B'-plus.

The current outlook is stable.

The downgrade reflects recently announced lower earnings estimates for 1999, and the potential for additional share authorizations and/or debt-financed acquisitions to enhance shareholder value.

Promus' merger with Doubletree has been disappointing to date due to the culture clashes between the two organizations, and the quality and brand identity problems still plaguing the Doubletree flag. Also, Promus has not made as much progress in disposing Doubletree real estate or RFS leases as Standard & Poor's had anticipated.

With its stock price significantly down from previous levels, an additional $200 million share repurchase was recently authorized.

Despite these issues, overall business trends remain steady, and financial leverage has not materially increased over the last year.

New management has done a good job of assembling a financial team, retaining key operating personnel, quickly assessing the status and needs of the various brands, and moving more aggressively to shed its $1 billion real estate portfolio.

The company's primary business model of franchising and management remains a high-margin, low capital-intensive business.

While REVPAR (revenue per available room) growth rates have slowed across the brands, unit growth is the key driver of cash flow, and the pipeline is healthy for most of the company's flags.

Promus' core Embassy and Hampton brands are leaders in their respective segments.

Homewood Suites is a quality hotel chain that needs additional distribution, while the Doubletree flag needs better quality, consistency, and distribution if it is to become a nationally recognized four-star business hotel.

The longer-term plan for the Red Lion brand is not yet clear.

The company recently announced the sale of 13 Homewood Suites, but continues to carry a significant amount of real estate relative to pre-Doubletree levels.

Currently, about 45% of Promus' earnings before interest, taxes, depreciation, and amortization (EBITDA) are derived from owned, leased, and joint venture hotels. Efforts are underway to dispose of the Doubletree real estate assets, and management has indicated a goal of $300 million-$500 million in 1999. However, buyers for real estate are somewhat limited, and the company took back $75 million of seller financing in the Homewood transaction.

At March 31, 1999, the company had $811 million of debt and generated about $430 million of EBITDA on a trailing 12-month basis.

After capitalizing the RFS leases, EBITDA coverage of interest expense is just over 5 times (x), and debt to cash flow is low at under 2.5x.

Proceeds from real estate sales and internally generated cash flow will be used to fund share repurchases, some new hotel development, and mezzanine loans to spur franchise efforts.

Some acquisition risk exists, as the company may seek to gain a bigger presence in the timeshare business, expand overseas, or acquire other brands.

Industry fundamentals continue to be solid, and the company should experience modest cash flow growth in 1999. While the financial policy of the new management team has yet to be demonstrated, Standard & Poor's believes that the company will strive to maintain a credit profile reflective of the current rating.
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