Fitch | November 17, 2015

Fitch Ratings-New York-17 November 2015: Fitch Ratings has affirmed Marriott International's (NYSE: MAR) 'BBB' long-term Issuer Default Rating (IDR) and 'F2' short-term IDR and revised the company's Rating Outlook to Positive from Stable. Today's rating actions follow the company's announced acquisition of Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT). Fitch has also affirmed Starwood Hotels & Resorts Worldwide, Inc's 'BBB' IDR and revised the Rating Outlook to Positive from Stable. A full list of the rating actions taken for both companies follows at the end of this release. KEY RATING DRIVERS Fitch believes Marriott's credit profile will be more consistent with a 'BBB+' IDR after combining with Starwood, notwithstanding its unchanged financial policy that includes managing adjusted leverage at its stated 3.0x to 3.25x target. Fitch expects the acquisition to lower Marriott's business risk profile and improve profitability, which should enhance the company's ability to navigate future lodging cycle downturns. The combined company will have the largest high-quality, internationally recognized brand portfolio in the industry (30 brands). Acquiring Starwood will also enhance Marriott's position in advanced emerging markets. Lastly, Fitch estimates cost synergies of $200 million, primarily stemming from the elimination of duplicative functions, and economies of scale, which implies that the company will have a permanently lower fixed cost structure and strong free cash flow margin. The company's all stock funding strategy for the acquisition further demonstrates its commitment to its existing financial policies, including maintaining a low investment grade rating. Fitch views the reaction of Marriott's and Starwood's franchisees as a key risk stemming from the transaction. To resolve the Positive Outlook, Fitch will consider the combined company's ability to demonstrate similar or enhanced gross and net unit growth and achieve cost synergies during the one- to two-year Rating Outlook horizon. Fitch would consider revising the Rating Outlook to Stable from Positive if management changes its financial policy and opts to maintain leverage at a level higher than 3.0x to 3.25x. To that end, Fitch believes Marriott is committed to maintaining a 'BBB' rating, and the company does not presently see strategic reasons for targeting a higher rating. Fitch plans to withdraw its ratings for Starwood after the transaction closes. Fitch expects Marriott will assume Starwood's outstanding unsecured bonds and/or refinance any of Starwood's bonds that may be subject to change of control provisions that are triggered by this transaction. FINANCIAL POLICY UNCHANGED Fitch views Marriott's all-stock transaction funding strategy as a credit positive that demonstrates the company's commitment to its low investment grade rating. Fitch expects the company to sustain leverage within its stated 3.0x to 3.25x target range at the through 2018, excluding any non-routine transaction costs incurred during 2016 and 2017, which the company estimates could total $100 to $150 million. Fitch's base case projections assume Marriott achieves $200 million in annualized synergies by 4Q'17. Fitch also expects Marriott to move swiftly to complete Starwood's owned asset disposition program by selling, and, in most cases taking back long-term franchise/management contracts, Starwood owned hotels with approximately $1.8 billion of company estimated after-tax value. Fitch believes Marriott's demonstrated ability to execute asset sales on a global basis, as well as cloud cover provided by the transaction synergies will help expedite the sales process. Although dispositions have accelerated under Starwood's new management, investors have generally been disappointed with the company's asset sales pace since it announced the program several years ago. INCREASED SCALE AND DIVERSITY Acquiring Starwood strengthens Marriott's credit profile by adding scale and diversity, resulting in lower lowering business risk. The combined company will have an unmatched 5,500 hotels with 1.1 million rooms across 30 brands. The combination will also bolster Marriott's international presence and enhance its relationship with affluent leisure and millennial travelers, many of which favor Starwood-owned brands. Starwood also brings a strong portfolio of lifestyle brands and leisure presence to the table, as well as its Starwood Preferred Guest loyalty system. The legacy Starwood hotel system will benefit from Marriott's arguably stronger positions with large group and business travelers. Fitch also believes that Marriott benefits (whether intentional, or not) from defensive attributes by acquiring Starwood. Press reports had indicated that Hyatt Hotels Corp. was considering a bid for Starwood. The combination of Hyatt and Starwood would arguably result in another U.S. lodging company of similar scale to Hilton and Marriott. POSITIVE FRANCHISEE REACTION IS KEY Fitch sees moderate execution risk related to the transaction, primarily stemming from the company's franchisee relationships. This risk encompasses the combined company's ability to attract and retain franchisees to its system and is likely to play out over many years as existing Marriott and Starwood franchise and management contracts expire. There is an element of franchisee dissatisfaction within the lodging industry regarding the proliferation of new hotel brands from the major lodging brand owners, including Marriott. Marriott has historically been a leader in creating new brands to target an ever more granularly segmented traveler. Although theoretically designed to appeal to different customers, in practice there has been some level of overlap, which reduces the value franchisees receive from affiliating with a given brand and could hamper the company's rooms system growth. In addition, Marriott and Starwood each own hotel brands that compete head-to-head in the market place, including in adjacent locations that would otherwise be prohibited within current franchise radius restrictions. This could result in an elevated level of brand and/or management contract losses if existing Starwood and Marriott franchisees opt to 're-flag' their properties. Also, some hotel owners have historically expressed a preference for Starwood over Marriott, and vice versa. These owners may opt to re-flag their hotels when contracts expire – regardless of whether a competitive Marriott branded hotel is nearby. Notwithstanding the above, some merger related aspects will benefit franchisees. For example, the breadth and depth of the combined company's loyalty rewards system will be unmatched in the industry, and the company should benefit from lower administrative costs from combining the programs. In addition, Fitch believes the merger will reduce costs for franchisees in several areas, including training and recruiting, inventory procurement, credit card processing, accounting, IT and revenue management. Lastly, owners should see a benefit from the sharing of best practices, as well as the combined company's deeper understanding of customer travel patterns. From an organizational perspective, Marriott and Starwood have similar structures that should facilitate the integration of the combined company's regional divisions and ensure a solid level of cost synergies from the elimination of duplicative overhead. Fitch expects the company to use discretionary share repurchases as a lever to maintain leverage at or below its 3.0x to 3.25x target to the extent that cost synergies are lower (or higher) than the $200 million run-rate assumed in our base case projections. KEY ASSUMPTIONS –U.S. lodging industry RevPAR growth increases by 7% during 2015 and decelerates, but remains positive, to the mid-to-low single digit range for the balance of the forecast period; –Fee revenue grows in-line with Gross Potential Revenue (GPR is a Fitch estimate of total system-wide room revenue from which Marriott can receive fees). 2015 GPR is based on 5-7% net supply growth and mid-single digit RevPAR growth, resulting in low double digit increases through 2017; –Franchise fees as a percentage of GPR increase due to limited service additions in North America that are weighted towards the franchise model, as opposed to managed or owned; –MAR returns its excess free cash flow to shareholders through dividend increases and share repurchases, regulating the latter to maintain at or near its 3.0x to 3.25x leverage target at the 'BBB' rating; RATING SENSITIVITIES –To resolve the Positive Outlook, Fitch will consider the combined company's ability to demonstrate similar or enhanced gross and net unit growth and achieve cost synergies during the one- to two-year Rating Outlook horizon. –Fitch would consider revising the Rating Outlook to Stable from Positive if management changes its financial policy and opts to maintain leverage at a level higher than 3.0x to 3.25x. –Fitch expects Marriot to pull back on investment spending and share repurchases, as well as its CP balance in the event of a significant downturn. A negative rating action could take place if Marriott chose not to adjust its capital allocation in a downturn scenario. –A negative rating action could also occur if a lodging industry downturn occurs that is more severe than Fitch's stress case scenarios, which contemplates industrywide RevPAR declines of 13-15%. Due at least in part to the more attractive supply growth environment relative to the last recessions, Fitch believes RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 to 2009. –Marriott's 'F2' short-term rating is supported by its back-up liquidity coverage from its RCF and sufficient internally generated sources of liquidity to amply cover near-term debt service. If these liquidity measures deteriorate over time, there could be pressure on the 'F2' rating. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Marriott International, Inc. –Long-term IDR at 'BBB'; –Short-term IDR at 'F2'; –Commercial paper at 'F2'; –Senior unsecured credit facility at 'BBB'; –Senior unsecured notes at 'BBB'. Marriott RHG Acquisition B.V. –Short-term IDR at 'F2'; –Commercial paper at 'F2'. Fitch has revised the Rating Outlook for Marriott International, Inc. to Positive from Stable. Fitch has affirmed the following ratings: Starwood Hotels & Resorts Worldwide, Inc. –IDR at 'BBB'; –Senior unsecured credit facility at 'BBB'; –Senior unsecured notes at 'BBB'.