Posadas Downgraded To 'CCC+' On Travel Downturn From COVID-19 Outbreak; Outlook Still Negative On Refinancing Risks

  • The lodging industry is facing unprecedented declines in revenue from travel restrictions, booking cancellations, and deferrals stemming from the coronavirus pandemic. Mexico-based lodging company, Grupo Posadas S.A.B. de C.V., will face extraordinary pressures on its operations at least during the second quarter of 2020, and weak recovery prospects for the rest of the year.
  • Despite extraordinary measures announced by the company on March 23, 2020, we believe its operations and liquidity remain highly vulnerable to failure to contain the spread of coronavirus, while also dependent upon improvement in business and economic conditions. Under such circumstances, Posadas' financial commitments appear to be unsustainable in the medium term.
  • On March 25, 2020, S&P Global Ratings lowered its long-term global scale issuer credit and issue-level ratings on Posadas to 'CCC+' from 'B'.
  • The negative outlook reflects the growing risks from stalling economic and business conditions on Posadas' operations, with plummeting occupancy, average daily rates, and timeshare revenues. Under such circumstances, we estimate significant stress over company's funds from operations, reducing its cash reserves and increasing refinancing risk related to its 2022 senior unsecured notes.
MEXICO CITY (S&P Global Ratings) March 25, 2020—S&P Global Ratings took rating actions described above. In our view, the coronavirus spread represents a transformational event for the global lodging and leisure industry, triggering massive group hotel booking cancellations and deferrals, causing occupancy, average daily rates and revenue per available room (RevPAR) at hotels to tumble, in addition to stress on timeshare sales and recurring revenues. These factors have eroded demand for Posadas' lodging services. According to the company, occupancy rates have decreased below 20% in the past days, significantly lower than historic levels of around 70%. This will likely imply high double-digit declines in Posadas' average daily rates and RevPAR, paralyzing its cash generation at least during the second quarter of 2020, coupled with frail recovery prospects for the second half of the year, even if the virus is contained. This has led us to revise downward our assumptions for 2020, including a double-digit drop in sales and a net leverage ratio well above 10x for year-end 2020. In our last review, we expected several factors that could reduce market appetite for the refinancing of Posadas' 7.875% senior unsecured notes such as sluggish economy, budget cuts to tourism and rising security issues, but ramifications of the novel coronavirus shock add significant pressure to the company's debt refinancing and its capacity to service its debt obligations, absent any relevant improvement of business and economic conditions.
These measures include shutting down 76 managed hotels with 14,955 rooms (equivalent to 49% of managed inventory), cutting non-essential expenses and deferring a significant portion of capital expenditures originally budgeted for 2020, with the exception of final works on one hotel and maintenance investments. We consider that these measures will protect the company's liquidity in the next couple months. Nevertheless, depending on the depth and durability of the downturn in travel and lodging, and on anticipated recession in Mexico and the U.S., the range of outcomes could vary widely for Posadas' EBITDA, cash generation, and liquidity this year. We estimate Posadas' RevPAR to plummet about 30% in 2020, which would increase the company's highly leveraged position, temporarily bumping our adjusted debt to EBITDA above 10x and lowering EBITDA interest coverage just above 1.0x, when including the company's lease commitments. Moreover, a significantly weakened EBITDA and cash generation, coupled with tax commitments near MXN360 million, could imply using a substantial portion of the company's cash reserves if the company's latest measures remain insufficient to mitigate the coronavirus shock. Posadas also announced its current cash position of about MXN1.6 billion, of which about $51 million are denominated in dollars, equivalent to slightly more than 12 months of debt service. Cash position includes two asset sales for MXN348 million during the first two months of 2020, and the company expects to sell another hotel in the near term, which would add about MXN190 million to its cash reserves.
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