Credit analyst sees possible upside in Starwood deal

New York, April 9 - The unexpected rebound in lodging demand could create some upside in Starwood Hotels & Resorts Worldwide's upcoming bond offering (Ba1/BBB-) if it is priced to the high yield side of its ratings, according to Kathy Shanley, senior bond analyst with Gimme Credit.

In a report Tuesday, she said the possible gains outweigh the event risk of buying into Starwood, which has historically been an active acquirer and could also be a potential target itself.

Starwood announced Monday it is selling $1 billion of bonds with five- and 10-year maturities.

Shanley noted that leisure travel demand has rebounded, driving a stronger than expected recovery in the lodging sector even though business travel is still in a slump. Travel industry analysts now see at least modest gains in revenue per available room (RevPAR), the analyst noted.

"Starwood's diversified portfolio and well-known brands position it favorably to benefit from a recovery in the economy, but its balance sheet is likely to remain heavily leveraged for the foreseeable future," Shanley wrote.

The new offering will be used to pay down borrowings on the company's credit facility and to retire the increasing-rate notes issued in 1998. As a result, it will not impact Starwood's debt/EBITDA (earnings before interest, taxation, depreciation and amortization) ratio, currently around 4.5 times, Shanley said. However Standard & Poor's has indicated it will likely affirm the current ratings since the note issuance will relieve near-term refinancing pressures.

Last year EBITDA/interest fell to 3.4 times from 3.7 times, prompting the company to cut back on capital expenditures, the analyst added. Asset sales are possible and Starwood says it is exploring the sale of 25 luxury Italian hotels, land, golf courses and marinas but Shanley said she does not expect meaningful debt reduction in the near term.

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