Starwood books upgrade as hotel demand slows
Starwood Hotels & Resorts Worldwide Inc., which is selling assets and cutting interest costs to protect its investment-grade rating as it faces slowing demand for lodging, is already getting an upgrade in the bond market.
The company's bonds yield 151 basis points, or 1.51 percentage points, more than similar-maturity Treasuries, closer to the 126 basis-point spread on debt rated A than the 209 basis points on its own BBB category. Starwood, which operates the W chain of luxury hotels, sold $350 million of 3.125 percent, 10- year bonds this month and will use the money together with some its $650 million in cash to retire $559.2 million of debt with coupons at least twice as high.
Starwood, which has been selling hotels as it seeks to increase the percentage of profit it generates from fees, has chopped its leverage ratio to a decade-low of 1.8 times from 4.51 times in the third quarter of 2009, a year in which the global economy contracted 2.4 percent. The company plans to generate 65 percent of its earnings from fees, chief executive officer Frits van Paasschen said on an Oct. 25 conference call.
"They are certainly better positioned now than they were in 2008," Chris Snow, an analyst at bond researcher CreditSights Inc., said in a telephone interview from New York. "Clearly, you would see some stress in terms of room rates and occupancies, but they have a pretty nice buffer if the cycle were to turn against them."
Starwood regained its investment-grade ranking this year after being cut to junk when revenue slumped in 2009. Yield data from Moody's Corp. indicates the Stamford, Connecticut-based company should be rated A3 instead of its current Baa2 grade.
The hotel operator has been selling real estate in a bid to focus on management operations driven by fees, which are less susceptible to decline in economic downturns than revenue from owning buildings.
"We've reduced the inherent risk in our business model," van Paasschen said during the Oct. 25 call with investors and analysts. "The fee business is far less volatile."
K.C. Kavanagh, a spokeswoman at Starwood, didn't respond to emails and telephone calls seeking comment on the company's finances.
The company's approach follows that of competitors such as Marriott International Inc., which gets about 90 percent of its earnings from fees, CreditSights's Snow said.
Starwood forecast earnings before interest, taxes, depreciation and amortization below analysts' estimates for the last three months of this year as demand for rooms slows around the world, van Paasschen said on the conference call. A recovery in demand has "lost its steam," he said.