Diamond Resorts International Inc. Downgraded To 'CCC+' On Very High Anticipated Leverage, Outlook Negative

  • Diamond Resorts International Inc.'s EBITDA and cash flow generation have deteriorated to levels that increased our measure of lease- and captive finance-adjusted leverage to a very high level of about 9x and decreased our measure of adjusted EBITDA interest coverage to a very thin level in the low-1x area in 2018. In addition, we do not expect the company's EBITDA or cash flow generation to improve significantly in 2019.
  • As a result, we believe the company is vulnerable to possible future operating missteps or an unexpected downturn in the economy over the next two years, and may have a capital structure that is unsustainable even though we believe liquidity is currently adequate.
  • We are lowering our issuer credit rating on Diamond to 'CCC+' from 'B-'.
  • At the same time, we are lowering our issue-level rating on the company's senior secured credit facility to 'B-' from 'B' and our issue-level rating on its senior unsecured notes to 'CCC-' from 'CCC'.
  • The negative outlook reflects our expectation for minimal cash flow generation and very high leverage in 2019. The outlook also incorporates our belief that Diamond is vulnerable to possible future operating missteps or an unexpected downturn in the economy over the next two years, which may render its capital structure unsustainable despite our assessment of adequate liquidity.
NEW YORK (S&P Global Ratings) April 17, 2019—S&P Global Ratings today took the rating actions listed above. We downgraded Diamond after lowering our EBITDA forecast for 2019 and 2020. The lower rating reflects our expectation that the company's adjusted EBITDA interest coverage will be about 1.25x in 2019, which is below our 1.5x downgrade threshold at the previous 'B-' rating. Despite our current base-case forecast, which assumes growth in the company's vacation ownership interest (VOI) sales in 2019, we expect credit measures to remain pressured due to elevated expenses.
The negative outlook on Diamond reflects our expectation for minimal cash flow generation and very high leverage in 2019. The outlook also incorporates our belief that the company is vulnerable to possible future operating missteps or an unexpected downturn in the economy over the next two years, which may render its capital structure unsustainable despite our assessment of adequate liquidity.
We could lower our rating on Diamond if we believe its operating performance will be impaired such that its liquidity becomes pressured, reducing the company's ability to service its debt. This would likely occur if Diamond is unable to increase its VOI sales, stabilize and reduce its provision for uncollectible vacation interest sales and other costs, and stabilize defaults and EBITDA from maintenance fees. Although we believe Diamond currently has an adequate cushion under its covenant thresholds, we could also lower our rating if we believe the company will violate any of its covenants. Additionally, we could lower the rating if the company pursues a debt repurchase that we assess to be a distressed exchange.
We could revise our outlook on Diamond to stable or raise our rating if we believe that its EBITDA and cash flows will improve in a sustained manner that gives us confidence the company will be able to maintain adjusted EBITDA interest coverage of more than 1.5x. This would likely be due to revenue growth and cost reductions.
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