Fitch Rates Starwood's 2019 Senior Notes 'BB+'; Outlook Negative

NEW YORK — Fitch Ratings has assigned a 'BB+' rating to Starwood Hotels & Resorts Worldwide Inc.'s (Starwood) senior notes due 2019. The company is proposing to issue $250 million of the ten-year notes. The Rating Outlook remains Negative.

The notes will rank equally with Starwood's other unsecured and unsubordinated debt. The proceeds from the offering will be used to fund concurrent tender offers for $200 million of 7.875% notes due 2012 and $100 million of 6.25% notes due 2013. If the full tenders are not accepted, remaining funds will be used for general corporate purposes. As a result, the issuance may be mostly leverage neutral depending on the success of the tender offer.

Fitch believes Starwood's liquidity is adequate relative to its upcoming needs and that the company is likely to be opportunistic with respect to refinancing and accessing the capital markets over the next few quarters. As of Sept. 30, 2009, Starwood had $113 million of available cash and $1.575 billion of availability on its $1.875 billion revolving credit facility, which expires in February 2011. Fitch calculates that the company generated roughly $243 million of free cash flow prior to dividend payments over the last 12 months (LTM) ending Sept. 30, 2009.

In addition, the company continues to enhance liquidity and improve its credit and leverage profile through the sale of non-core assets. In first quarter 2009 (1Q'09), Starwood signed an agreement to sell its Bliss Spas for roughly $100 million and closed the sale of the retail space at the St. Regis New York for $117 million. That followed the sale of two wholly-owned hotels in 3Q'09 that resulted in cash proceeds of $96 million. Enhanced liquidity and debt reduction could be supported over the next few months by the receipt of $200 million of proceeds related to an IRS settlement, and a timeshare receivable note sale. Both Marriott and Wyndham have successfully sold timeshare receivables recently, and securitization terms are improving, indicating the market is likely to be receptive to a Starwood securitization.

The proposed issuance and tender offers aim to push out some of the companies nearest bond maturities, although the issuance is not contingent on the success of the tender offers. The 2012 notes have $802 million outstanding and the 2013 notes have $604 million outstanding as of Sept. 30, 2009. Prior to the bond maturities, Starwood has a $300 million term loan due in September 2011, and its revolving credit facility expires in February 2011, and had only $159 million drawn as of Sept. 30, 2009. Given Starwood's solid free cash flow model despite the weak operating environment, the small amount of bank debt outstanding, and current access to capital in the financial markets, Fitch believes refinancing risk is minimal with respect to the 2011 bank debt maturities.

The 2019 notes are being issued under a supplemental indenture to the Sept. 13, 2007 base indenture that covers the 6.25% notes due 2013 and the 6.75% notes due 2018, which were issued in September 2007 and May 2008, respectively, when Starwood held an investment-grade rating. In May 2009, the company also issued 7.875% notes due 2014 under a supplemental indenture to the base indenture, after Starwood's rating was downgraded by Fitch to below investment grade.

As a result of being governed by the investment-grade base indenture, there are limited financial covenants protecting 2019 unsecured noteholders. The 2019 notes are not guaranteed by any subsidiaries and will be structurally subordinated to any subsidiary debt. Only $159 million of subsidiary debt was outstanding as of Sept. 30, 2009, but the indenture does not limit the ability of Starwood's subsidiaries to issue or incur debt or preferred stock. However, similar to those previously issued notes, the 2019 notes contain a change of control put at 101, as defined in the indenture.

Starwood's Rating Outlook remains Negative. Fitch revised the Outlook to Negative on Dec. 5, 2008, as it became clear the demand deterioration related to the recession was likely to be more severe than Fitch's stress case assumptions. Fitch downgraded Starwood's Issuer Default Rating (IDR) to 'BB+' from 'BBB-' on Feb. 4, 2009, due to Fitch's view that the deterioration in lodging demand trends had accelerated. If the improvement in lodging demand trends that became evident in recent months continues into early 2010 while the broader economic recovery gains traction and capital markets remain accommodating, the Rating Outlook could return to Stable at the current IDR of 'BB+'.

However, the Negative Outlook partially reflects weak credit protection measures relative to the 'BB+' IDR and current business risks. Fitch believes Starwood will continue to focus on debt reduction and balance sheet repair for at least the next few quarters and until there is greater confidence and visibility in lodging demand and the broader economic outlook. Unadjusted debt/EBITDA leverage was 4.3 times (x) as of Sept. 30, 2009 and could deteriorate further in upcoming quarters, although Fitch believes it will remain comfortably below the credit facility covenant, increased earlier this year to 5.5x from 4.5x.

The ratings continue to reflect Starwood's solid brands; quality assets, which include a sizeable, unencumbered owned asset portfolio that could be used as collateral if needed; and substantial product and geographic diversification. In addition, the ratings are supported by Starwood's solid free cash flow profile despite the significant industry and economic headwinds.

The following could lead to a downgrade of Starwood's IDR:

--Economic trends that point to a deeper and more prolonged recession than Fitch's current expectation, which calls for 2010 global GDP growth of 2.0% with U.S. GDP growth of 1.8%. Fitch believes the pace of expansion is likely to accelerate modestly in 2011 to 2.7% globally and 2.5% for the U.S.;

--Unadjusted comparable leverage that is expected to be sustained solidly above 4.5x, with an expectation that reduction below 4.0x in 2010 appears unlikely;

--As visibility with respect to 2010 becomes clearer, an expectation that 2010 RevPAR could decline in the mid-single-digit range or more;

--The company is unable to complete a timeshare receivable note sale in 2009, limiting debt reduction, and there is an expectation of an inability to monetize receivables.

The following could result in a revision in the Outlook to Stable:

--The broader economy tracks to Fitch's expectations of a return to slightly positive growth in 2010;

--Unadjusted comparable leverage is sustained below 4.5x, with an expectation that reduction below 4.0x in 2010 appears likely;

--Expected 2010 RevPAR declines are in the flat- to low-single-digit range;

--Travel demand shows further signs of improvement and the return of RevPAR growth becomes more visible and near term rather than Fitch's current expectation of late 2010 RevPAR growth;

--The free cash flow profile of the timeshare business appears solidly improved;

--The company completes a timeshare receivable note sale in 2009, and realizes other secondary sources of capital (IRS proceeds, asset sales, etc.) supporting debt reduction, and there is an expectation of a continued ability to monetize receivables.

Fitch currently rates Starwood as follows:

--IDR 'BB+';

--Senior unsecured revolving credit facility 'BB+';

--Senior unsecured term loan 'BB+';

--Senior unsecured notes 'BB+'.

Additional information is available at www.fitchratings.com.

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