Investing.com -- S&P Global has revised its outlook for Hyatt Hotels Corp (NYSE:H). from stable to negative, due to the leveraging impact of the company's acquisition of Playa Hotels & Resorts (NASDAQ:PLYA) N.V. The credit rating agency affirmed Hyatt's 'BBB-' issuer credit rating and 'BBB-' issue level rating on its unsecured debt.
Hyatt has signed an agreement to acquire Playa for approximately $2.6 billion, which includes about $900 million of Playa's debt, net of cash. The acquisition will be fully funded by new debt financing, which is expected to include a short-term prepayable unsecured term loan and senior unsecured notes. Hyatt has secured committed bridge financing for the acquisition of $2.7 billion.
As part of the agreement, Hyatt also announced a new asset sale program, with the intention of realizing at least $2 billion of gross proceeds by 2027. The proceeds will be used to repay the debt related to the acquisition. Despite the planned asset sale program providing a plausible path toward reducing leverage over the next two years, the transaction introduces near-term risks and will increase Hyatt's S&P Global Ratings-adjusted pro forma net leverage above the 3.75x downgrade threshold for the current rating until at least 2025.
The negative outlook reflects Hyatt's expected high leverage of about 4.75x as of the anticipated close of the transaction later this year. The S&P Global Ratings-adjusted leverage is expected to remain above the 3.75x downgrade threshold through at least 2025. The timing of the planned asset sales, which will be used to repay the acquisition-related debt, is partly reliant on stable macroeconomic conditions and investor interest in Playa’s resort portfolio.
The Playa acquisition increases Hyatt's exposure to the operating volatility of its owned and leased hotels in the near term, despite management's plan to sell the assets over the next two years. If Hyatt’s asset sale program is materially delayed, its EBITDA could be volatile while it maintains ownership of Playa’s resorts. The Mexican and Caribbean markets, where Playa’s resorts are located, are particularly susceptible to perceived safety risks, which can significantly impact visitation to the resorts in these regions.
However, the addition of Playa is expected to modestly strengthen Hyatt’s positions in the Mexican and Caribbean all-inclusive markets. Playa owns and manages 16 all-inclusive resort properties in Mexico, the Dominican Republic, and Jamaica. Eight of Playa’s properties are already Hyatt-branded under existing franchise agreements under its Ziva and Zilara brands. Playa’s portfolio draws a significant proportion of its guests from the affluent North American travel market, and it is well positioned in the all-inclusive resort vacation market, which is increasingly popular among consumers.
Assuming Hyatt can complete its asset sale program in its stated timeframe, the acquisition will likely strengthen its competitive advantages and make its cash flow more resilient over the cycle. Hyatt has indicated the company will generate over 90% of its EBITDA from asset-light revenue streams upon the completion of its new asset sale program. This is expected to improve its EBITDA margin to the 38%-40% range by 2027, from approximately 33% in 2024.
S&P Global stated it could lower its rating on Hyatt if the company's leverage remains above 3.75x beyond 2026, which could occur if it significantly slows the pace of its asset sales and corresponding debt reduction. This could happen if it is unable to find buyers at its preferred price or if a decline in inbound travel to the Mexican, Dominican Republic, and Jamaican markets leads to a pullback in hospitality investment in those regions. An unexpected pullback in overall travel that leads to a reduction in the company's RevPAR, revenue, and EBITDA, which it does not offset with debt reduction, could also result in a downgrade.
The outlook on Hyatt could be revised to stable if S&P Global becomes confident that Hyatt's asset sale and debt reduction program is progressing successfully in a manner that reduces and sustains S&P Global Ratings-adjusted net debt to EBITDA of below 3.75x.
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