Hilton Worldwide (HLT) Outlook Raised to Positive by S&P

Standard & Poor's Ratings Services today revised its rating outlook on Hilton Worldwide Holdings Inc. (NYSE: HLT) to positive from stable. The 'BB-' corporate credit rating on the company was affirmed.

At the same time, we revised our recovery rating on Hilton Worldwide Finance LLC's senior secured credit facilities to '1' (90% to 100% recovery expectation) from '2' (70% to 90% recovery expectation) and raised our issue-level rating on these loans to 'BB+' from 'BB', in accordance with our notching criteria.

In addition, we affirmed our 'B' issue-level rating on the company's senior notes. The recovery rating on the debt remains '6' (0%-10% recovery expectation).

The revised senior secured recovery rating reflects a lower amount of secured debt outstanding under our simulated default scenario as a result of voluntary prepayments of the term loan and our assumption that the company will repay debt maturing over the 2014 to 2017 period with internal cash flow or borrowings under the revolver. This results in improved recovery prospects for the credit facilities, enough to warrant a recovery rating of '1'.

The outlook revision to positive reflects our belief that over the near term, Hilton could improve total adjusted debt to EBITDA to below 6x. Once we are confident Hilton can sustain this measure of leverage below 6x over the lodging cycle, we could raise the rating one notch. We expect good revenue per available room (RevPAR) growth and operating performance at Hilton through 2015, and for Hilton to continue to reduce its high leverage over time using free cash flow for debt repayment. In addition, Hilton has outperformed our operating and credit measure expectations the past few quarters, primarily because of an improving EBITDA margin, and we have updated our forecast through 2015 to reflect good RevPAR performance and higher-than-anticipated debt repayment. In the first-quarter 2014, Hilton increased EBITDA 19% through strong group bookings, positive operating leverage from average daily rate (ADR) representing the majority of RevPAR growth, and expense control. In the 12 months ended March 2014, Hilton improved our measure of its reported EBITDA margin (including share-based compensation but not including FF&E reserves, Hilton's pro rata share of joint venture EBITDA, legal and restructuring expenses, or minority interests) nearly 300 basis points to about 32%. Total adjusted debt to EBITDA improved to the low-6x area as of March 2014, representing about a one-half turn lower level of leverage than we had anticipated.

We could lower 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 7x. While unlikely through 2015, this could occur following an unexpected global economic downturn that meaningfully impairs RevPAR and EBITDA.

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