UPDATE 1-Hyatt launches US$900m bond despite fallen angel risk

5 min read
Americas, EMEA
William Hoffman

Banker comments and launch details added

Hyatt Hotels is the third US hotel chain to come to market in recent weeks and is building on the success of its peers with a US$900m two-part trade Tuesday.

Spreads started considerably wide of the company's outstanding curve and did not move far from initial price thoughts as investors sought compensation for the heightened risk in the travel and leisure sector, which has taken a pounding amid travel restrictions due to the Covid-19 pandemic.

Average leisure spreads are the widest of any sector in the high-grade universe at around 491bp over Treasuries as of Monday, according to ICE BofA data.

"It's a tough deal because it’s a tough sector," one syndicate banker away said.

"Hospitality is struggling at best, and hotels are empty, so not surprised it didn’t move a huge amount."

Hyatt comes with considerable fallen angel risk given that Moody's and S&P reaffirmed their Baa3 and BBB- ratings while placing it on watch negative earlier this month.

Management even included coupon step ups to compensate investors for the downgrade risk.

"The confirmation reflects Moody's expectation that despite material earnings decline and negative free cash flow in 2020 related to global travel restrictions around the spread of Covid-19, Hyatt's liquidity is sufficient to get through this unprecedented time for the lodging industry," Pete Trombetta, Moody's lodging and cruise analyst, said in its report.

Bookrunners Bank of America, Goldman Sachs and JP Morgan started initial price thoughts in the 5.875% area on a five-year and 6.25% area on a 10-year.

At those levels, Hyatt started with a nearly 100bp premium over where its outstanding 4.85% 2026 bond is yielding on average in the secondary this week, according to MarketAxess data.

Through price progression, spreads tightened in to 5.375% on the five year and 5.75% on the 10 year for some 50bp-60bp of new issue concessions, the banker away estimated.

"We have seen execution metrics on deals become more disparate recently," a second banker away added.

"While some deals in sectors more exposed to the current crisis are still requiring upwards of 50bp of premium to get trades over the line, others at the lower beta, counter-cyclical end of the spectrum are pricing deals much closer to fair value."

Despite the large concession, the company did manage to take more out of the market with a US$100m upsize from initial talk.

Hyatt is also offering a substantial premium over recent deals from Marriott International (Baa3/BBB-) and Hilton Domestic Operating (Ba2/BB).

Marriott received more than US$20bn in demand last week for a US$1.6bn five-year that priced at 5.75%. Follow on demand remained strong as it has since tightened more than 100bp in the secondary to a yield of 4.731%, according to MarketAxess data.

Likewise, Hilton went to the high-yield market and priced a US$500m five-year non call two at 5.375% and a US$500m eight-year non call three at 5.75%.

That same Hilton five-year has rallied slightly to a yield of 5.23% in the secondary.

"Although we expect Hyatt to maintain access to sufficient liquidity to withstand the pandemic, the company's higher owned asset exposure relative to Marriott leaves it more levered to the near-term impacts of the pandemic and the expected subsequent recession," CreditSights wrote in a report.


Hyatt plans to use the proceeds to pay down the outstanding balance under its US$1.5bn revolving credit facility, which should free up more liquidity to help the company weather the current crisis.

Additionally, Hyatt's unsecured revolving credit facility will become secured and the new proceeds will allow it to cancel its US$500m 364-day bridge facility, according to an S&P report.

The added cash reserves come amid a slew of cost cutting measures including furloughing the majority of its corporate employees, cutting salaries for those still working, and halting chairman and CEO cash salaries through May, according to CreditSights.

"We have assumed the company will experience material negative cash flow while hotels are closed or running at very low occupancy, but it will have adequate liquidity assuming recovery in the second half of 2020 to address its notes maturity in 2021," S&P said.

Hyatt has just one US$250m note maturing in 2021 and no maturities this year or in 2022, according to Refinitiv data.

Unlike Hilton, Hyatt will also have access to the Federal Reserve's primary market corporate credit facility because it held investment grade ratings as of March 22.

While smaller hotel organizations are expected to receive Congressional stimulus money under the CARES Act that would make them ineligible for Fed funding in the capital markets, Hyatt and Marriott are not expected to receive those funds and should have access to the Fed's Corporate Credit Facility.