Covivio Hotels Upgraded To 'BBB+' After Same Action On Parent; Outlook Stable


  • On Aril 16, 2019, S&P Global Ratings upgraded French property company Covivio to 'BBB+' because the group now has some headroom under its new tightened financial policy to accommodate growth opportunities and maintain debt to debt plus equity well within 45%-50% and EBITDA interest coverage comfortably above 3x.
  • Covivio Hotels (formerly Fonciere des Murs) is a core subsidiary of Covivio, integral to the group's current identity and future strategy.
  • We are therefore raising our long-term rating on Covivio Hotels to 'BBB+' from 'BBB', and assigning a stable outlook, as well as raising the rating on the debt to 'BBB+' from 'BBB', all in line with our ratings and outlook on Covivio.
PARIS (S&P Global Ratings) April 17, 2019--S&P Global Ratings today took the rating actions mentioned above. We align our ratings on Covivio Hotels and its debt with the ratings on the parent Covivio, because Covivio Hotels is a core subsidiary of Covivio and integral to the group's current identity and future strategy. Covivio recently increased its stake in Covivio Hotels to 43.2% from 42.3% at year-end 2018.
Covivio Hotels has a prudent financial policy, targeting a loan-to-value ratio of 40%, and it is integral to Covivio's strategy, which we expect would likely support its subsidiary if necessary. Covivio representatives make up the majority of Covivio Hotels' board, which ensures good alignment of strategic interests. Moreover, we believe the hotels segment is highly strategic to the Covivio group. Because their business strategies and asset profiles are aligned, we think it highly unlikely that Covivio would sell Covivio Hotels in the coming years.
Finally, the Covivio group is liable for Covivio Hotel's obligations by operation of law under the French SCA (Société en Commandite par Actions) regime, a strong indicator of potential group support.
For these reasons, we add two notches to our assessment of Covivio Hotels' 'bbb-' stand-alone credit profile (SACP) to reflect the high likelihood that Covivio would support its subsidiary in case of financial stress.
The stable outlook on Covivio Hotels reflects that on Covivio, as well as our expectation that the Covivio group will be able to maintain credit measures commensurate with the 'BBB+' rating throughout the cycle, such as an S&P Global Ratings ratio of debt to debt plus equity well within the 45%-50% range and EBITDA interest coverage comfortably above 3x. This will require Covivio to maintain a disciplined financial policy, with disposals or equity increases compensating the company's sustained growth initiatives through capital spending and acquisitions over the next 24 months.
We also expect Covivio Hotels' diversified portfolio of hotels to continue generating stable and a significant proportion of Covivio's rental income, supported by the good locations of its assets, at least for the next two years. Furthermore, we assume that the share of management and franchise contracts in total revenues will not increase significantly in the coming years.
We could consider lowering the rating on Covivio Hotels if we perceived that Covivio's approach toward Covivio Hotels had changed such that we revised our view of Covivio Hotels' status within the group.
We could revise our outlook to negative if Covivio's rental activities deteriorated, resulting in a debt-to-debt plus equity ratio around 50%, or EBITDA interest coverage below 3x. Large debt-funded acquisitions unmatched in time and amount by significant disposals or equity injections could also cause us to revise the outlook or lower the ratings, as could significant fund allocations to higher-risk operations than pure real estate rental, such as new property development or hotel management, could also trigger an outlook revision or downgrade.
In our view, rating upside is currently limited and would hinge on Covivio's ability to sustain credit measures commensurate with an 'A-' rating, such as an S&P Global Ratings-adjusted ratio of debt to debt plus equity around 40% or below. An upgrade would also depend on Covivio remaining focused on improving the size and underlying diversity of its portfolio, with robust operating performance indicators even during less favorable economic environments while nevertheless maintaining a long-dated debt-maturity profile.
Although it would not result in an upgrade, we could revise up our assessment of Covivio Hotels' SACP to 'bbb' from 'bbb-' if we observed that the company had greater insulation from the hospitality industry's volatility (for example from an increased share of fixed rents in total revenue), or significantly stronger credit metrics.
We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000 pr@ademcetinkaya.com