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S&P Upgrades Marriott Vacations Worldwide (VAC) to 'BB'; Gross Debt-to-EBITDA Seen as Sustainable

August 8, 2014 2:36 PM EDT

Standard & Poor's Ratings Services said today that it raised its corporate credit rating on Marriott Vacations Worldwide (NYSE: VAC) to 'BB' from 'BB-'. The outlook is stable.

The upgrade reflects our view that MVW can sustain average consolidated gross debt to EBITDA of about 3x, notwithstanding its share repurchase program and the potential for a moderate level of opportunistic acquisitions--both of which MVW could partly fund using existing cash balances and expected levels of free cash flow. MVW is also likely to sustain EBITDA coverage of interest expense at more than 5x through 2015. These measures are good for our "significant" financial risk profile assessment. Although the warehouse and term securitization debt are nonrecourse to MVW, we include them and about $70 million in operating leases and $40 million in preferred stock in our leverage measure. In addition, we believe that MVW intends to pursue a relatively measured pace of sales growth, and it is not likely to meaningfully increase the percentage of timeshare sales that are financed. As a result, we believe that the company's financing operations are unlikely to result in an increase in consolidated leverage over the next few years. In addition to its good consolidated leverage profile for our "significant" financial risk profile assessment, the upgrade also reflects MVW's strong liquidity and brand in the timeshare industry, which compare favorably to its peers'.

Our stable rating outlook reflects our expectation for leverage in the 3x area and EBITDA coverage of interest expense in the 5x area through 2015--levels we consider good for the "significant" financial risk profile assessment. The stable outlook also reflects the company's "strong" liquidity profile. "We also believe that MVW intends to pursue a relatively measured pace of sales growth, and that management views its good access to external financing sources as a strategic advantage," said Standard & Poor's credit analyst Emile Courtney. "Although growth opportunities will arise and external financing needs may increase from time to time, we believe that MVW's policy is to manage consolidated leverage at about 3x, in line with the current financial risk profile assessment and rating."

We could lower the rating as a result of significant acquisitions and other investments. We could also downgrade the rating if MVW pursues a more rapid pace of resort development and sales growth that would require higher levels of external financing than we expect, in a manner that sustains total consolidated debt to EBITDA above the 3x area.

Although unlikely because of the company's growth focus and share repurchase activity, we could upgrade MVW if we believe the company can sustain leverage in the 2x area.



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