Choice Hotels International Inc. Outlook Revised To Negative Due To COVID-19-Related Travel Downturn; Ratings Affirmed

  • The lodging and leisure sector is currently facing an unprecedented decline in revenue and will continue to do so for as long as there are bans and restrictions on travel and consumer activity related to the coronavirus pandemic.
  • In addition, we believe a recession is likely in the U.S. this year, and consumer and business travel spending will likely be much lower than our assumptions in our previous base-case forecast, even in a coronavirus containment and recovery scenario.
  • We are revising our outlook on Choice Hotels International Inc. to negative, and affirming the 'BBB-' issuer credit and debt ratings.
  • The negative outlook reflects the possibility of a downgrade over the next few months, or sooner, if we no longer believe containment will occur by about the end of the second quarter so that travel and hotel demand could begin to recover.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions above.
The negative outlook reflects the likelihood of significant anticipated stress on revenue and cash flow over the next several months.  We believe revenue per available room (RevPAR) in key markets in the U.S. severely declined over the past three weeks, falling about 70% in the week ended March 20 in the U.S., and this pattern will likely continue in the coming weeks. Choice plans to reduce the burden of the travel downturn on its franchisees to the extent it can by reducing marketing and reservation costs to hotel owners and potentially providing flexibility on fees from franchisees. These accommodative actions would likely increase Choice's cash burn from working capital uses, partly due to delayed or waived fees as some franchisees may be generating minimal revenues in the short-term and would not be able to make the payments. As a result, Choice could rely substantially on its revolver for liquidity over the next few months, causing leverage to spike. Assuming containment by the end of the second quarter at the earliest, we are assuming U.S. RevPAR declines 20%-30% in 2020. Under our revised base-case assumptions we currently estimate the company's adjusted debt to EBITDA could be in the 3x-4x area in 2020, reflecting a spike from the moderate level of low-2x in 2019. Therefore, leverage at Choice may increase and become weak compared to our 4x downgrade threshold even if the coronavirus is contained and consumer activity begins to recover in second-half 2020.
The negative outlook reflects the possibility of a downgrade over the next few months, or sooner, if we no longer believe containment will occur by about the end of the second quarter so that travel and hotel demand could begin to recover.
There is currently a high degree of uncertainty in our updated base-case scenario. We could lower the rating if we no longer believe Choice could quickly recover following a spike in leverage in 2020 and maintain our measure of leverage under 4x in 2021. We could also lower the rating if we no longer believe Choice could sustain adequate liquidity in the form of revolver availability and cash balances.
It is unlikely that we would revise the outlook to stable for the duration of the global travel downturn. We also would need to be confident the recovery is robust enough to enable Choice to maintain it under 4x adjusted debt to EBITDA and above 20% funds from operations (FFO) to debt.
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.

Disclaimers: AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. All data and information is provided “as is” for personal informational purposes only, and is not intended for trading purposes or advice. Please consult your broker or financial representative to verify pricing before executing any trade.

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