S&P Global Ratings assigned its ‘CCC+’ issue-level rating and ’3′ recovery rating to Aimbridge Acquisition Co. Inc.’s proposed first-lien term loan due 2026. S&P assumed the company will receive proceeds of $150 million from this issuance. The ’3′ recovery rating indicated S&P’s expectation for meaningful (50%-70%; rounded estimate: 50%) recovery for first-lien lenders in the event of a payment default. Aimbridge will use the proceeds to repay its outstanding revolver balance and provide additional near-term liquidity.
“Our issuer credit rating on Aimbridge is ‘CCC+’, with a negative outlook. The large number of COVID-19 infections in the U.S. and Europe in recent months will likely slow the recovery in business and group travel and lodging demand,” S&P said.
“Because Aimbridge began 2020 with very high leverage following its acquisition of Interstate Hotels & Resorts Inc., the effects of the pandemic and the related steep recessions in the U.S. and Europe will likely cause adjusted debt to EBITDA to be even higher because the company will likely generate modest levels of positive EBITDA this year,” the rating agency said.
The company’s leverage could potentially improve in 2021 if a medical solution for COVID-19 emerges in the first half of the year and achieves some level of broad dissemination during the remainder of 2021, but Aimbridge’s leverage could remain above 10x depending upon the recovery in its revenue per available room (RevPAR) and EBITDA margin. The company’s liquidity will likely be pressured in the near term and Aimbridge will need to rely on its liquidity on-hand to meet its cash needs. In addition, S&P’s current rating and negative outlook reflect the possibility that Aimbridge’s capital structure may not be sustainable over the long term if the company cannot sufficiently improve cash flow to cover its fixed charges.
“Despite our forecast for very high leverage, we have not lowered our rating on Aimbridge because it has materially reduced its cash usage in recent months and U.S. industry RevPAR has been slowly but steadily improving in a manner that gives us some confidence the company’s liquidity runway will improve,” S&P said.
Approximately 90% of Aimbridge’s portfolio properties are in the U.S. and the company manages hotels that compete in multiple segments, including economy, midscale, select service, and full-service hotels.
“It is our understanding that Aimbridge’s U.S. RevPAR results across its portfolio in March-August 2020 were broadly similar to the RevPAR performance of select service hotels, which have performed less favorably than economy and extended stay hotels but better than full-service and luxury hotels,” S&P said.
“The company’s cash usage during the second-quarter of 2020 was about $8 million. It is our understanding that cash usage would likely be in the $7.5 million-$8 million range per month going forward, based on the current operating environment,” the rating agency said.
S&P believes Aimbridge currently has about $70 million of liquidity, which would increase to $220 million pro forma for the proposed $150 million term loan issuance.” This pro forma level of liquidity suggests that the company has a liquidity runway of at least 27 months or potentially more if its RevPAR continues to recover over the coming months. This liquidity runway could plausibly enable Aimbridge to sustain its operations until the recovery in travel and lodging demand gains momentum in 2021.
S&P updated its base case forecast to incorporate the following assumptions:
— In the U.S., the economy, midscale, and extended-stay segments have outperformed the industry while the upper upscale and luxury full-service segments have underperformed since the pandemic began. This divergence has worsened in recent months and could persist until there is a medical solution to COVID-19 that improves consumers’ willingness to travel. S&P assumes this divergence continues into at least the first half of 2021;
— European RevPAR declines by 40%-60% in 2020 before potentially rebounding by 40%-60% in 2021 (but is still 20%-30% below 2019 levels);
— S&P believes leisure travel will recover first, business transient second, and group business third because of potential lingering concerns around gatherings and social distancing guidelines. Group travel will likely not recover until there is a vaccine for the coronavirus or a reliable therapy for COVID-19;
— S&P assumes Aimbridge will manage its cost base such that it reaches breakeven at lower occupancy rates than its hotels have historically operated with because its guests will likely require lower service levels, particularly for food and beverage or any high-touch point service, for a prolonged period;
— S&P assumes U.S. industry RevPAR declines by 40%-50% in 2020. S&P assumes Aimbridge’s RevPAR will decline by the high end of this range in 2020 due to its exposure to full-service hotels;
— Based on S&P’s assumption that the economy will continue to recover and the rebound in travel demand will be sustained through 2021, the rating agency assumes U.S. industry RevPAR could increase by 40%-50% in 2021 but remain 20%-30% below 2019 levels. S&P assumes Aimbridge’s RevPAR will increase by the high end of the rating agency’s industry range in 2021. The rating agency preliminarily assumes a medical solution emerges in the first half of 2021 and achieves some level of broad dissemination over the course of 2021, enabling Aimbridge’s RevPAR recovery to gain momentum in 2022;
— S&P assumes EBITDA is minimal in 2020 but improves substantially in 2021 if Aimbridge efficiently manages its costs during the recovery period; and
— The company significantly reduces its capital spending in 2020 and 2021 relative to 2019.
Based on these assumptions, S&P arrives at the following credit measures:
— Adjusted debt to EBITDA is very high in 2020 and above 10x in 2021;
— Low EBITDA coverage of interest expense in 2020, improving to about 1x in 2021; and
— If a medical solution attains acceptance and broad dissemination in 2021, adjusted debt to EBITDA could improve toward 10x in 2022.
Environmental, social, and governance (ESG) credit factors relevant to this rating change:
— Health and safety
ISSUE RATINGS–RECOVERY ANALYSIS
Key analytical factors
— S&P is assigning its ‘CCC+’ issue-level rating and ’3′ recovery rating to Aimbridge’s proposed first-lien term loan due 2026.
— S&P’s ‘CCC+’ issue-level rating on the company’s existing first-lien credit facilities is unchanged. The existing first-lien debt consists of a revolver due in 2024 and a first-lien term loan due in 2026.
— The ’3′ recovery rating indicates S&P’s expectation for meaningful (50%-70%; rounded estimate: 50%) recovery for lenders in the event of a payment default.
— The $160 million second-lien term loan due in 2027 is unrated.
— S&P’s simulated default scenario contemplates a payment default in 2022 and assumes a severe economic downturn that reduces hotel demand, external shocks that discourage travel, and cyclical overbuilding in the hotel industry. In such a scenario, the lingering effects of the COVID-19 pandemic could continue to suppress demand and result in significant cash usage that leads to a payment default.
— S&P values the company as a going concern using a 6x EBITDA multiple, which reflects its lack of hard assets and operations in a competitive marketplace for third-party hotel managers.
Simulated default assumptions
— Simulated year of default: 2022
— EBITDA at emergence: $100 million
— EBITDA multiple: 6x
— Net recovery value for waterfall after administrative expenses (5%): $570 million
— Obligor/nonobligor valuation split: 91%/9%
— Estimated first-lien debt claims: $1.06 billion
— Estimated value available to first-lien lenders: $564 million
— Recovery expectations: 50%-70% (rounded estimate: 50%)
Note: All debt amounts include six months of prepetition interest.