S&P Upgrades Hilton Worldwide (HLT) to 'BB'; Sees Good RevPAR, Operating Performance Growth Through 2016

Standard & Poor's Ratings Services today said it raised its corporate credit rating on Hilton Worldwide Holdings Inc. (NYSE: HLT) to 'BB' from 'BB-'. The rating outlook is positive.

In addition, we raised our issue-level rating on Hilton Worldwide Finance LLC's senior secured credit facilities one notch to 'BBB-' from 'BB+', in accordance with our notching criteria. The recovery rating on the facilities remains '1', reflecting our expectation for very high recovery (90% to 100%) for lenders in the event of a payment default. Also, we raised our issue-level rating on the company's senior notes one notch to 'B+' from 'B'. The recovery rating on the debt remains '6', indicating our expectation for negligible recovery (0%-10%) in the event of a payment default.

"The upgrade reflects our expectations for good RevPAR growth and operating performance at Hilton through 2016, and for Hilton to continue to reduce its igh leverage over time using free cash flow for debt repayment," said Standard & Poor's credit analyst Emile Courtney.

We believe strong transient and group demand, limited lodging supply growth in the U.S., and Hilton's success growing rooms in its global hotel system led to low-teens percentage EBITDA growth in 2014 (in line with our base-case forecast), and will lead to high-single-digit EBITDA growth in 2015 and mid-single-digit EBITDA growth in 2016. Hilton continues to add rooms to its system with minimal capital, and we believe the company was successful in achieving its stated voluntary debt prepayment range of $800 million to $1 billion in 2014. We also expect Hilton will continue to repay debt at similar levels in 2015, and this, combined with EBITDA growth, should enable Hilton to sustain total lease, joint venture, and captive finance adjusted debt to EBITDA below 6x over the lodging cycle.

In addition, Hilton announced this morning it has closed the sale of the Waldorf Astoria New York for $1.95 billion and is redeploying the proceeds as part of a tax efficient like-kind exchange to acquire five hotels for $1.76 billion (including $450 million of assumed debt). The acquired hotels generate roughly twice the level of EBITDA compared to the Waldorf Astoria New York, modestly contributing to Hilton's deleveraging path. Included in our debt assumption in 2015 is the repayment of the $525 million Waldorf Astoria New York mortgage with the asset sale proceeds. Because Hilton will use the proceeds from the sale of the Waldorf Astoria New York to buy hotels, the company's exposure to its sizable owned and leased hotel portfolio is not reduced.

The positive rating outlook reflects our expectations for good revenue per available room (RevPAR) growth and operating performance at Hilton through 2016, and for Hilton to continue to reduce its high leverage over time using free cash flow for debt repayment. Once we are confident Hilton can sustain total adjusted debt to EBITDA below 5x over the lodging cycle, we could raise the rating one notch.

We could revise the outlook to stable or lower the ratings one notch in the event that Hilton's operating performance significantly underperforms our expectations and its total adjusted debt-to-EBITDA ratio remains above 6x. While unlikely through 2016, this could occur following an unexpected global economic downturn that meaningfully impairs RevPAR and EBITDA.

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