Fitch Ratings has downgraded
Fitch has also downgraded Posadas'
Posadas' downgrade reflects the continued pressure on the company's liquidity position from cash burn resulting from weaker than expected hotel operations. Social distancing measures implemented by the authorities kept hotels in
The 'RR4' Recovery Rating assigned to the senior notes issuance indicate average recovery prospects given default. 'RR4'-rated securities have characteristics consistent with historically recovering 31%-50% of current principal any related interest.
The ratings were withdrawn due to Commercial Purposes.
KEY RATING DRIVERS
Weaker Than Expected Operations: Restrictions on hotel operations in response to social distancing measures from the global health crisis led to closed hotels since
Tight Liquidity Headroom: Fitch estimates that the effect on the company's operations from closed hotels during April, May and the first half of June could result in a monthly cash burn of around MXN90 million-100 million. Cash burn intensity is expected to decrease as hotels gradually resume operations; all hotels are expected to reopen by the end of July. Posadas' liquidity position might be compromised for the rest of the year given estimated cash burn and scheduled debt service payments. Therefore, Fitch does not rule out the possibility that Posadas could evaluate a debt restructuring process in the mid-term in order to achieve a capital structure that is sustainable in the long term. If operating conditions improve or cash burn intensity decreases, Posadas would have favorable prospects to improve its capital structure.
Negative Estimated FCF: Fitch estimates Posadas will generate negative FCF in 2020, as occupancy levels are low and costs for health and sanitizing initiatives increase. FCF is a key factor to stabilize the company's liquidity. FCF will continue to be pressured by cash outflows related to 2017's tax settlement; strict control over costs, expenses and working capital management should allow Posadas to preserve liquidity; in addition, the company suspended all non-essential investments.
FX Exposure: Posadas is exposed to the depreciation of the Mexican Peso against the
DERIVATION SUMMARY
Posada's 'CC' ratings reflect that default is probable. The company's financial flexibility has diminished since the coronavirus crisis started and its liquidity position continues to deteriorate. Posadas' rating reflects weak operational results, expected negative FCF and pressured liquidity. Its liquidity position is tight compared with debt service coverage. Negative CFO could deplete cash on hand and limit the company's financial flexibility. The material deviation from the company's expected deleveraging path pressured the company's capital structure.
In Fitch's view, the company's deteriorated financial and liquidity metrics are in line with the 'CC' category. Posadas' financial profile, liquidity and financial flexibility compares unfavorably to peers in the 'B' category, such as
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Agency's Rating Case for the Issuer
Hotel closures in response to social distancing measures and limited occupancy rates as operations gradually recover will affect revenues in 2020; Fitch expects a recovery during 2021;
Future growth focuses on managed properties so portfolio mix moves away from owned and leased properties;
Sales for the vacation club segment materially decrease significantly during 2020;
Pressured KPI's in the short- to medium term;
EBITDA margins lower than previously estimated;
Capex reflect expected recurring maintenance capex;
Tax settlement payment outflows continue until 2023.
KEY RECOVERY RATING ASSUMPTIONS
The 'RR4' Recovery Rating assigned to the senior notes issuance indicates average recovery prospects given default. 'RR4'-rated securities have characteristics consistent with historically recovering 31%-50% of current principal and related interest.
The recovery analysis assumes that
The post-reorganization EBITDA assumption is MXN647.6 million; it represents an 8.3% discount from an already stressed EBITDA generation scenario during 2019. This stressed EBITDA covers annual interest payments reflecting a distressed level of revenue generation across business lines. An EV multiple of 5.0x was used to calculate post organization valuation based on the industry multiple, which was adjusted for the country risk.
Fitch calculates recovery prospects for the senior unsecured notes in the 31% to 50% range based on waterfall approach. This level of recovery results in the company's senior unsecured notes being rated the same as its IDR of 'CC'/'RR4'. The 'RR4' Recovery Rating assigned to the senior notes issuance indicates average recovery prospects given default.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
Fitch does not anticipate any positive rating actions in the near future, but the following actions could be beneficial for the company's rating:
Operating metrics in both owned and leased hotels that stabilize toward historic levels;
Strengthening in FCF to bolster liquidity position;
Improved liquidity risk profile and a strengthened balance sheet structure.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
Continued pressure in the company's liquidity profile;
Increased perceived risk of a potential default;
Failure to set a clear refinancing strategy for the senior notes.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Weakening Liquidity and Refinancing Risk Exists: Posadas' financial flexibility is gradually diminishing as the company has been using cash to maintain operations while hotels remained closed. The debt service of the Sr. Notes for 2020 amounts
Cash and equivalents as of
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch adjustments for operating lease treatment under IFRS 16. Also, income from the sale of assets is included in revenues on Posadas' financial statements; Fitch takes these nonrecurring items out of operating profits.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING RECOVERY PRIOR
Grupo Posadas, S.A.B. de C.V . LT IDR CC Downgrade CCC+
LC LT IDR CC Downgrade CCC+
Natl LT CC(mex) Downgrade B-(mex)
Natl LT WD(mex) Withdrawn B-(mex)
senior unsecured
LT CC Downgrade RR4 CCC+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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