Hilton Grand Vacations flogs bonds to ride vacation home demand
Resort and timeshares company Hilton Grand Vacations, rated B2/B-/BB-, raised US$850m in an upsized high-yield bond deal on Thursday to finance its acquisition of fellow timeshare operator Diamond Resorts.
The acquisition was announced in March in a deal that valued Diamond's equity around US$1.4bn and will be financed by the new eight-year non-call three senior unsecured bond offering, alongside a US$1.3bn seven-year senior secured term loan.
The bond was led by Deutsche Bank (left lead), BofA Securities, Barclays, Credit Suisse, Goldman Sachs, J.P. Morgan, and MUFG. After being upsized from US$675m, the bond was priced at 5.00%, at the tight end of initial price talk of 5.00%-5.25%.
While the bond was said to be oversubscribed, one banker said investors were becoming more price sensitive, in a market that has seen a record pace of issuance and almost US$11bn of cash exit high-yield funds in the year-to-date, according to Lipper data.
"Some of the order books this week have shown more price limits from investors as they try to be somewhat more disciplined," the banker said.
Hilton Grand Vacations has one other bond, a 6.125% US$300m 2024 senior note that is callable in December this year. It was last seen trading at a yield of 2.36% and a cash price of 105, according to MarketAxess data.
Confidence
The merger and debt sale reflects the growing confidence in the leisure industry as more parts of the US reopen and dismantle pandemic-related restrictions that had rocked the finances of hotel and vacation companies last year.
“You talk to anybody who rents a vacation home. They’ll say probably all the homes have been snapped up for the year. People want to get away, and they’re going to be reluctant to travel overseas,” said one high-yield fund manager.
Diamond will also add to the diversity of Hilton’s portfolio of timeshares. Diamond has benefited from having more car-accessible vacation homes as air travel lost its luster during the pandemic.
But some investors and ratings agencies have taken a dim view of how higher-rated Hilton Grand Vacations would raise its debt levels by absorbing a more levered Diamond Resorts, rated Caa1/CCC+ by Moody's and S&P.
S&P put a negative outlook on Hilton Grand Vacations's BB rating and Moody’s downgraded its corporate rating to Ba3 from Ba2, because of its expectation that leverage at the combined business will rise to around 5x Ebitda by the end of 2022.
That could limit the wiggle room for the timeshares company if the business takes a hit later.
“There’s a reason it's low-rated,” said Adam Coons, portfolio manager at Winthrop Capital Management. “Leverage has picked up across the board, especially among companies that were massively affected by the pandemic like Hilton and Carnival Cruises. They’re going to survive now, but they’re not going to have as many levers to pull looking forward."