Moody's Reaffirms Ratings on Marriott (MAR) Amid Move to Acquire Starwood (HOT)

Moody's Investors Service affirmed Marriott International, Inc.'s (NYSE: MAR) Baa2 senior unsecured rating following its announcement that it will acquire Starwood Hotels & Resorts Worldwide Inc. (after the spin-off of the timeshare business) in a transaction valued at approximately $13.4 billion. Moody's estimates this represents about a 12.2 times EBITDA multiple. Starwood shareholders will receive .92 shares of Marriott stock in exchange for each Starwood share and $2 per share in cash. The transaction value includes Marriott's assumption of $2.2 billion of Starwood recourse debt at September 30, 2015. Moody's expects Marriott to take steps to ensure that the existing Starwood debt will rank pari passu with the Marriott debt in the capital structure. The rating outlook remains stable.

The following ratings are affirmed:

Marriott International, Inc.

Senior unsecured notes at Baa2

Commercial Paper rating at Prime-2

Senior unsecured shelf at (P)Baa2

Marriott RHG Acquisition B.V.

Backed Commercial Paper rating at Prime-2

RATINGS RATIONALE

The affirmation acknowledges the conservative way the acquisition is being financed with equity and excess cash which results in Marriott maintaining credit metrics appropriate for its Baa2 rating. The affirmation is also supported by Marriott's financial policy remaining unchanged following the merger, including its 3.0 to 3.25 times lease adjusted debt to EBITDAR target. Moody's estimates pro forma for the acquisition of Starwood (excluding the timeshare business) for the twelve months ended September 30, 2015, Marriott's debt to EBITDA would be 2.8x (versus 3.0x Marriott standalone), EBITA to interest expense would be 7.0x (versus 7.1x currently), and retained cash flow to net debt would be 23.7%(versus 26.7% currently).

The affirmation also acknowledges that the combined entities would be the largest hotel company worldwide with about 1.1 million rooms in its hotel system compared to Hilton with more than 731,000 rooms and InterContinental Hotels Group with about 727,000 rooms. It will increase the Marriott brand portfolio to 30 brands and add to the Marriott brand portfolio several strong brands including Westin, W, and St. Regis, amongst others. The transaction will also increase Marriott's geographic diversity by reducing its reliance on North America to about 70% from 79% currently and strengthening its penetration in Asia Pacific to 14% from 8%. However, Starwood currently generates lower operating margins than Marriott. In addition, after the acquisition, Sheraton will be the second largest brand behind the Marriott brand representing about 14% of Marriott's pro forma hotel system. Moody's views the Sheraton brand as being weakly positioned as exemplified by its weak Revenue Per Available Room (RevPAR) performance relative to the Marriott brand. For the nine months ended September 30, 2015, Sheraton's North American RevPAR was $114.44 compared to the Marriot brand North American RevPAR at $149.84.

"The combination of Marriott and Starwood creates the world's largest hotel system with a broad range of well-recognized brand names. However, Sheraton will represent Marriott's second largest brand name and it is unclear whether the strategies put in place to address Sheraton's weak RevPAR performance will be successful," stated Maggie Taylor, Senior Vice President at Moody's.

Marriott's Baa2 rating reflects its large scale of operations, well recognized brands, and good diversification. The rating also reflects the company's high level of franchised (49% of system pro forma for Starwood) and managed (45% of system for Starwood) rooms which results in a lower level of capital investment relative to those peers that own and operate hotels. This provides Marriott with greater discretion to curtail growth spending and returns to shareholders during times of economic stress. The rating acknowledges that Marriott will continue to make share repurchases with its excess free cash flow and may borrow to finance share repurchases from time to time so long as it remains within its leverage target. Marriott targets a 3.0 to 3.25 times debt to EBITDA leverage target(as calculated using the present value of operating leases). The ratings incorporate Moody's expectation that Marriott will - as it has in the past - curtail share repurchase activity in favor of debt reduction during periods of earnings pressure. Ratings also reflect the company's sensitivity to economic cycles, and the existence of contingent liabilities.

The stable rating outlook acknowledges that we expect Marriott's financial policy will remain unchanged particularly its leverage target. Thus, as Marriott's earnings increase, its debt levels will also increase resulting in credit metrics remaining even to their current levels.

Ratings could be downgraded if retained cash flow to net debt approaches 18% or if Marriott's financial policy becomes more aggressive. Ratings could be upgraded if operating performance remains strong and Marriott adopts more conservative leverage targets such that retained cash flow to adjusted net debt would remain above 25%.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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