rating action: moody's revises nh hotels' outlook to positive · rating action:...

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Rating Action: Moody's revises NH Hotels' outlook to positive Global Credit Research - 27 Sep 2017 London, 27 September 2017 -- Moody's Investors Service, ("Moody's") today affirmed the corporate family rating of NH Hotel Group S.A. (NH) at B2, the probability of default rating at B2-PD and the rating of NH's senior secured notes due 2023 at Ba3. The rating outlook has been revised to positive from stable. "Our decision to revise the rating outlook to positive follows the NH's successful streamlining of its operations and repositioning of its portfolio resulting in improved KPIs and cost savings," says Maria Maslovsky, a Moody's Vice President -- Senior Analyst and the lead analyst for NH Hotels. "In addition, NH has significantly extended its maturity profile and strengthened its liquidity." RATINGS RATIONALE Today's rating action reflects strengthened performance as a result of portfolio repositioning and improved operations. From 2014 to 2016, NH Hotels invested approximately €200 million in upgrading and repositioning its owned and leased hotel portfolio built through a series of acquisitions to align the assets with a focus on the NH Collection brand. Simultaneously with this effort, the company invested in new soft goods for the properties and introduced technological advances including a new revenue management system, seamless front-office transactions and back-of-house applications and a mobile app. Combined with clearer brand definition and focused marketing efforts, NH's Tripadvisor scores improved considerably and led to strengthening KPIs with RevPAR (revenue per available room) growing 10.7% in the first half of 2017 primarily driven by rate improvements. NH has also focused on improving profitability by exiting loss-making leases and management contracts and restructuring lease agreements toward variable rather than fixed arrangements. The company anticipates realizing €7-€8 million of cost savings in 2017 and a further €7-€10 million in 2018. The positive outlook also reflects successful refinancing and extending debt maturities while improving liquidity. NH Hotels refinanced multiple debt maturities with its €285 million secured bond offering in September 2016 and a subsequent €115 million tap in March 2017 extending its average tenor to 4.4 years at June 2017 from 3.1 years at December 2015. As a result of both operational improvements and resulting EBITDA growth, as well as the recent refinancing, NH's leverage measured as debt/EBITDA declined to 4.8x for the twelve months ended 30 June 2017 from 5.3x at year-end 2016 and 5.6x the year before. Simultaneously, NH's coverage measured as EBITA/interest expense grew to 1.3x for the twelve months ended 30 June 2017 from 1.1x in 2016 and 1.0x in 2015. The company has also generated positive free cash flow (after capex and dividends) in the twelve months ended 30 June 2017 reversing a multi-year negative trend. All metrics are adjusted by Moody's. Moody's adjusts leverage metrics by applying a 5x multiple to the annual rent expense. The company does not disclose in its audited accounts the undiscounted minimum commitments under operating leases; however, Moody's believes that adjusted debt/EBITDA could be revised higher than 4.8x if the net present value of future lease commitments were used. Moody's anticipates that with the introduction of IFRS 16 in 2019 this point will be clarified. NH Hotels' B2 corporate family rating continues to reflect its established European platform focused on midscale, upscale and upper upscale urban business hotels, its successful portfolio turnaround, as well as reduced leverage, strengthened coverage and positive free cash flow combined with improved liquidity. The rating also takes into consideration that NH's growth initiatives in Latin America, while limited in scope, carry a measure of risk primarily related to some of the Latin American markets facing challenging macroeconomic environments, in addition to currency exchange and repatriation issues. NH's liquidity is good. It includes positive operating cash flow and cash of €114.5 million at 30 June 2017, as well as a €250 million revolving credit facility (RCF) which is currently undrawn and approximately €53 million of other available credit lines. These sources should be able to address the upcoming €250 million maturity of the convertible bond in 2018 (should it not convert to equity) and the remaining €100 million maturity of the secured high yield bond in 2019. NH's stock has recently been trading above the strike price of the convertible bond (€4.92 per share), although it has been volatile historically. The company has no other maturities until 2023. A rating upgrade would be likely if the current strong operating performance continues and the company

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Page 1: Rating Action: Moody's revises NH Hotels' outlook to positive · Rating Action: Moody's revises NH Hotels' outlook to positive Global Credit Research - 27 Sep 2017 London, 27 September

Rating Action: Moody's revises NH Hotels' outlook to positive

Global Credit Research - 27 Sep 2017

London, 27 September 2017 -- Moody's Investors Service, ("Moody's") today affirmed the corporate familyrating of NH Hotel Group S.A. (NH) at B2, the probability of default rating at B2-PD and the rating of NH'ssenior secured notes due 2023 at Ba3. The rating outlook has been revised to positive from stable.

"Our decision to revise the rating outlook to positive follows the NH's successful streamlining of its operationsand repositioning of its portfolio resulting in improved KPIs and cost savings," says Maria Maslovsky, aMoody's Vice President -- Senior Analyst and the lead analyst for NH Hotels. "In addition, NH has significantlyextended its maturity profile and strengthened its liquidity."

RATINGS RATIONALE

Today's rating action reflects strengthened performance as a result of portfolio repositioning and improvedoperations. From 2014 to 2016, NH Hotels invested approximately €200 million in upgrading and repositioningits owned and leased hotel portfolio built through a series of acquisitions to align the assets with a focus on theNH Collection brand. Simultaneously with this effort, the company invested in new soft goods for the propertiesand introduced technological advances including a new revenue management system, seamless front-officetransactions and back-of-house applications and a mobile app. Combined with clearer brand definition andfocused marketing efforts, NH's Tripadvisor scores improved considerably and led to strengthening KPIs withRevPAR (revenue per available room) growing 10.7% in the first half of 2017 primarily driven by rateimprovements. NH has also focused on improving profitability by exiting loss-making leases and managementcontracts and restructuring lease agreements toward variable rather than fixed arrangements. The companyanticipates realizing €7-€8 million of cost savings in 2017 and a further €7-€10 million in 2018.

The positive outlook also reflects successful refinancing and extending debt maturities while improvingliquidity. NH Hotels refinanced multiple debt maturities with its €285 million secured bond offering in September2016 and a subsequent €115 million tap in March 2017 extending its average tenor to 4.4 years at June 2017from 3.1 years at December 2015. As a result of both operational improvements and resulting EBITDA growth,as well as the recent refinancing, NH's leverage measured as debt/EBITDA declined to 4.8x for the twelvemonths ended 30 June 2017 from 5.3x at year-end 2016 and 5.6x the year before. Simultaneously, NH'scoverage measured as EBITA/interest expense grew to 1.3x for the twelve months ended 30 June 2017 from1.1x in 2016 and 1.0x in 2015. The company has also generated positive free cash flow (after capex anddividends) in the twelve months ended 30 June 2017 reversing a multi-year negative trend. All metrics areadjusted by Moody's. Moody's adjusts leverage metrics by applying a 5x multiple to the annual rent expense.The company does not disclose in its audited accounts the undiscounted minimum commitments underoperating leases; however, Moody's believes that adjusted debt/EBITDA could be revised higher than 4.8x ifthe net present value of future lease commitments were used. Moody's anticipates that with the introduction ofIFRS 16 in 2019 this point will be clarified.

NH Hotels' B2 corporate family rating continues to reflect its established European platform focused onmidscale, upscale and upper upscale urban business hotels, its successful portfolio turnaround, as well asreduced leverage, strengthened coverage and positive free cash flow combined with improved liquidity. Therating also takes into consideration that NH's growth initiatives in Latin America, while limited in scope, carry ameasure of risk primarily related to some of the Latin American markets facing challenging macroeconomicenvironments, in addition to currency exchange and repatriation issues.

NH's liquidity is good. It includes positive operating cash flow and cash of €114.5 million at 30 June 2017, aswell as a €250 million revolving credit facility (RCF) which is currently undrawn and approximately €53 millionof other available credit lines. These sources should be able to address the upcoming €250 million maturity ofthe convertible bond in 2018 (should it not convert to equity) and the remaining €100 million maturity of thesecured high yield bond in 2019. NH's stock has recently been trading above the strike price of the convertiblebond (€4.92 per share), although it has been volatile historically. The company has no other maturities until2023.

A rating upgrade would be likely if the current strong operating performance continues and the company

Page 2: Rating Action: Moody's revises NH Hotels' outlook to positive · Rating Action: Moody's revises NH Hotels' outlook to positive Global Credit Research - 27 Sep 2017 London, 27 September

achieves further debt reduction including the possible conversion of the convertible bond. Moody's would alsoexpect NH to maintain its credit profile at close to current levels with leverage (debt/EBITDA) below 5.0x,coverage (EBITA/interest) approaching 1.5x and cash flow (RCF/net debt) above 10%, along with adequateliquidity at all times and no material deterioration in the LTV coverage of the secured notes.

Negative rating pressure would be precipitated by any operational reversals such that leverage deteriorates to6.5x, coverage reverts to 1.0x and cash flow to net debt drops to 5%. Any liquidity challenges would also beviewed negatively as would a material deterioration in the LTV coverage of the secured notes.

Upward pressure on the senior secured notes rating is unlikely in the near-term. The two-notch uplift for thebond rating from the corporate family rating reflects support from subsidiary guarantors, a security packageincluding real assets and a cushion from convertible bond. With the approaching convertible bond maturity inNovember 2018, the support for the instrument rating will be diminished.

NH Hotel Group S.A. is a top six European hotel company with 379 hotels and over 58,000 rooms managing aportfolio of upscale and upper upscale hotels in 29 countries including Spain, Italy, Benelux, Germany and anumber of Latin American countries. In 2016, the company reported revenues of €1.475 billion.

The principal methodology used in these ratings was Business and Consumer Service Industry published inOctober 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of thismethodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certainregulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series orcategory/class of debt or pursuant to a program for which the ratings are derived exclusively from existingratings in accordance with Moody's rating practices. For ratings issued on a support provider, thisannouncement provides certain regulatory disclosures in relation to the credit rating action on the supportprovider and in relation to each particular credit rating action for securities that derive their credit ratings fromthe support provider's credit rating. For provisional ratings, this announcement provides certain regulatorydisclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may beassigned subsequent to the final issuance of the debt, in each case where the transaction structure and termshave not changed prior to the assignment of the definitive rating in a manner that would have affected therating. For further information please see the ratings tab on the issuer/entity page for the respective issuer onwww.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of thiscredit rating action, and whose ratings may change as a result of this credit rating action, the associatedregulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the followingdisclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from ratedentity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the relatedrating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legalentity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosuresfor each credit rating.

Maria MaslovskyVice President - Senior AnalystCorporate Finance GroupMoody's Investors Service Ltd.One Canada SquareCanary WharfLondon E14 5FAUnited KingdomJOURNALISTS: 44 20 7772 5456Client Service: 44 20 7772 5454

Page 3: Rating Action: Moody's revises NH Hotels' outlook to positive · Rating Action: Moody's revises NH Hotels' outlook to positive Global Credit Research - 27 Sep 2017 London, 27 September

Mario SantangeloAssociate Managing DirectorCorporate Finance GroupJOURNALISTS: 44 20 7772 5456Client Service: 44 20 7772 5454

Releasing Office:Moody's Investors Service Ltd.One Canada SquareCanary WharfLondon E14 5FAUnited KingdomJOURNALISTS: 44 20 7772 5456Client Service: 44 20 7772 5454

© 2017 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors andaffiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGSAFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDITRISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, ANDMOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVEFUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKESECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEETITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATEDFINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANYOTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, ORPRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’SPUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’SPUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDITRISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC.CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDEINVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONSARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLDPARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONSCOMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR.MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THEEXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKEITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FORPURCHASE, HOLDING, OR SALE.

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measures so that the information it uses in assigning a credit rating is of sufficient quality and from sourcesMOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,MOODY’S is not an auditor and cannot in every instance independently verify or validate information receivedin the rating process or in preparing the Moody’s publications.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives,licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, orincidental losses or damages whatsoever arising from or in connection with the information contained herein orthe use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees,agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses ordamages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damagearising where the relevant financial instrument is not the subject of a particular credit rating assigned byMOODY’S.

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NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS,MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHEROPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNERWHATSOEVER.

Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation(“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds,debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have,prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and ratingservices rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintainpolicies and procedures to address the independence of MIS’s ratings and rating processes. Informationregarding certain affiliations that may exist between directors of MCO and rated entities, and between entitieswho hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of morethan 5%, is posted annually at www.moodys.com under the heading “Investor Relations — CorporateGovernance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the AustralianFinancial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (asapplicable). This document is intended to be provided only to “wholesale clients” within the meaning of section761G of the Corporations Act 2001. By continuing to access this document from within Australia, you representto MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and thatneither you nor the entity you represent will directly or indirectly disseminate this document or its contents to“retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is anopinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer orany form of security that is available to retail investors. It would be reckless and inappropriate for retail investorsto use MOODY’S credit ratings or publications when making an investment decision. If in doubt you shouldcontact your financial or other professional adviser.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiaryof Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-ownedsubsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary ofMJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, creditratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatmentunder U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial ServicesAgency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and

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municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (asapplicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) forappraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

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