Fitch Affirms Marriott's Ratings Following Announcement of Timeshare Spinoff Transaction

NEW YORK--()--Fitch Ratings has affirmed Marriott International's (Marriott) ratings including its 'BBB' Issuer Default Rating (IDR). The affirmations follow Marriott's announcement that it plans to spin off its timeshare business in a tax-free transaction. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this release.

The transaction will be a credit positive in terms of business risk if completed as expected. The longer-term capital intensity of the company's timeshare segment and reliance on the securitization markets result in greater cash flow volatility than Marriott's lodging fee business. However, Fitch expects Marriott's financial policies will remain unchanged following the spinoff, resulting in credit metrics consistent with its current 'BBB' IDR.

Fitch expects that all of the assets and liabilities of the timeshare segment (including securitized debt) will be transferred with the spinoff, while all of the company's corporate unsecured debt will remain with Marriott International. As of year-end 2010, Marriott had $2.83 billion of total debt, including $1.81 billion of non-securitized debt and $1.02 billion of securitized debt collateralized by timeshare loan receivables.

Marriott reported 2010 adjusted EBITDA of $1.04 billion, with $817 million attributable to lodging and $227 million to timeshare. However, a sizable part of the profitability of the timeshare segment comes from consumer loan financing. In Fitch's view, $55 million of timeshare interest expense should be included in adjusted EBITDA, since Marriott includes the interest income from those loans in its reported adjusted EBITDA. Making this additional adjustment would reduce Marriott's reported consolidated adjusted EBITDA to $989 million and its timeshare adjusted EBITDA to $172 million. Fitch estimates that a significant portion of timeshare adjusted EBITDA calculated in this manner is generated from consumer financing.

Based on the figures above, Fitch calculates last 12 months (LTM) leverage (debt/adjusted EBITDA) of roughly 2.2 times (x) for Marriott's lodging business. Adjusting for the capitalization of Marriott's operating leases adds roughly 0.6x-0.7x turns of leverage, so Marriott has some cushion relative to Fitch's adjusted leverage threshold of 3.0x or below for Marriott's 'BBB' IDR. However, Fitch expects Marriott to use the additional debt capacity to invest in growth initiatives or return cash to shareholders over the next few years.

The timeshare business will be a materially more leveraged company that will maintain a non-investment grade credit profile. Certain aspects of the spinoff, such as the allocation of various expenses and the franchise fees that Marriott charges the new timeshare company, have yet to be disclosed and will impact the profitability of both entities.

Given Marriott's solid position within its 'BBB' IDR and potential growth prospects for its lodging business over the next few years, Fitch believes there is little incentive for Marriott to adopt more conservative financial policies that would warrant an upgrade. That said, Fitch will continue to review the company's financial policies as additional disclosure related to the timeshare spinoff is released, while noting the modest improvement in Marriott's business risk profile.

Fitch affirms Marriott's ratings as follows:

--Long-term IDR at 'BBB';

--$2.4 billion senior unsecured credit facility at 'BBB';

--$1.6 billion of senior unsecured notes at 'BBB';

--Short-term IDR/commercial paper at 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps' (Jan. 7, 2011);

--'Evaluating Corporate Governance' (Dec. 16, 2010);

--'Fitch Upgrades Marriott's IDR to 'BBB'; Outlook Stable' (Dec. 8, 2010);

--'Short-Term Ratings for Corporate Finance' (Nov. 2, 2010);

--'Corporate Rating Methodology' (Aug. 13, 2010);

--'Operating Leases: Updated Implications for Lessees' Credit' (Aug. 13, 2009).

Applicable Criteria and Related Research:

Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=588285

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

Short-Term Ratings Criteria for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Operating Leases: Updated Implications for Lessees' Credit

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222

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Contacts

Fitch Ratings
Primary Analyst
Michael Paladino, CFA, +1-212-908-9113
Senior Director
Fitch, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Kevin Lam, +1-212-908-9147
Associate Director
or
Committee Chairperson
William Warlick, +1-312-368-3141
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Paladino, CFA, +1-212-908-9113
Senior Director
Fitch, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Kevin Lam, +1-212-908-9147
Associate Director
or
Committee Chairperson
William Warlick, +1-312-368-3141
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com