Moody’s Downgrades “NHH” to B3 over Dropping Occupancy Til 1Q21 while MINT Has 94% in NHH

Moody’s Investors Service, (Moody’s) has today downgraded NH Hotel Group S.A. (NH Hotel or NHH)’s corporate family rating (CFR) to B3 from B1. Concurrently, the probability of default rating was downgraded to B3-PD from B1-PD and the rating on its €357 million senior secured note due 2023 issued by NH Hotel was downgraded to B2 from Ba3. The outlook changed to stable from ratings under review.

 

RATINGS RATIONALE 

The rating action was prompted by the very sharp decline in occupancy in Q2 so far, driven by travel restrictions since the outbreak of coronavirus started during January 2020 with severe government measures restricting operations in many of NH Hotel’s core countries. From a regionally contained outbreak, the virus has rapidly spread to many different regions severely denting air travel and the lodging sector.

Moody’s revised base case assumptions are that the coronavirus pandemic will lead to a period of severe reductions in hotel guests over at least the next three quarters with closures of hotels in worse affected locations and very low occupancy or full cancellations for other hotels in other countries. The base case assumes there is a gradual recovery in hotel occupancy starting in the third quarter.

However, there are high risks of more challenging downside scenarios and the severity and duration of the pandemic and hence on travel restrictions while customer sentiment also remains uncertain. Moody’s analysis assumes around a 55% reduction in revenues for the full year 2020 and for 2021 to remain at least 20% below 2019 levels, but depending on length and severity of the travel restrictions this could include a significantly deeper downside case including essentially zero occupancy.

Over the last three months, NH Hotel has successfully reduced staff, supplier costs as well as negotiated fixed lease reductions. In addition, the company has significantly reduced capex. The company has managed to create a substantial cash buffer of more than €600 million as of end May, which includes full drawing its €250 million revolving credit facility, €24.5 million short-term bilateral credit facilities, a new loan of €260 million. Based on the company’s cash burn rate of €50-55 million per month at current occupancy levels, the company can survive almost a full year with no revenues.

The strong liquidity position is a key supporting factor of the B3 rating and the stable outlook. Additionally, NH Hotel has a significant pool of fully owned unencumbered assets amounting to €729 million as per the last appraisal date, which increases financial flexibility and could be used for secured borrowing. Looking at the group’s recovery prospects, Moody’s notes that NH Hotel has started to open hotels in select locations. Moody’s believes that the group’s share of domestic guests, which is on average 50%-55% of total guests for Euro area, and its focus on leisure travel (60%-70% vs. 30%-40% business travel) will be favourable in the recovery of NH Hotels occupancy levels and revenues, according to information provided by the Company in Q1 2020 results presentation.

However, 2020 will be a lost year for the lodging industry due to the coronavirus pandemic and the rating action focuses on the expected outcome for credit metrics towards the end of 2021, notably debt to EBITDA which Moody’s expects to be around 8x, up from LTM Q1 2020 of 5.9x. Also, EBITDA coverage will remain weak at around 1x by that time, which are the key drivers for the B3 rating. On a more positive note, we believe that NH Hotel has the capacity to return to become cash generative again over 2021, where we currently forecast around break even free cash flow generation, although noting a high degree of uncertainty related to the pace and shape of the recovery.

 

Given the current market situation we do not anticipate any short-term positive rating pressure. However, if debt to EBITDA would stay below 6x, EBITA interest coverage approaching 1.5x and cash-flow (RCF/net debt) at 10% all on a sustained basis and including Moody’s standard adjustments.

 

Minor International Public Company Limited (MINT) holds a portion of 94.1% in the business. In 2019, Hotel & Mixed-use business contributed 76% to MINT’s core revenue, while the main income for MINT’s Hotel & Mixed-use business comes from NH Hotel.