• NH suffers from debt overhang

NH Hoteles is looking the most vulnerable of Europe's major listed hoteliers during the current period of economic weakness.

The company's comparatively high leverage is raising concerns with investors and the difficult property market means asset sales are unlikely to come to the rescue soon.

The outlook is so dire, according to analysts at Jeffries International, that their target share price has been halved, from Eu7.00 to Eu3.50. "NH is struggling to absorb the debt from the acquisition of Jolly and the cost of its room development programme," said a note from Jeffries after the results.

The debt / EBITDA ratio is now 4.8 times according to Jeffries, which it said was the highest in the sector and breaching covenants which were at 4.0 times. NH's debt is principally a Eu650m facility agreed last year with no payments due until 2010. However, the company had planned to re-float or sell Sotogrande and this is now off the cards. "Debt level remain a significant and urgent risk," said the Jeffries note.

It also warned of greater cash flow concerns as trading worsens. The note commented that trading had already "deteriorated at an alarming rate".

The Jeffries forecast is for a 56% drop in profits for the full year. The problems for NH stem from its predominance of owned and leased hotels (87% of the total) and reliance on the difficult markets of Italy and Spain (63% of rooms in these countries).

The new target price reflects a 7.4 times economic value to EBITDA multiple on the hotels business although the property wing of NH, Sotogrande, had a 50% discount applied to its net asset value, last produced in 2007, as "real estate valuations are not credible in the current climate". This gave a blended EV / EBITDA multiple of 7.0 times for the company as a whole.

NH's results for the first nine months were actually better than its main domestic rival Sol Melia. NH reported total revenue up 1.4% to Eu1.113bn and EBITDA down 11.1% to Eu175.8m. Sol had sales down 3.0% to Eu991.7m and EBITDA down 18.6% to Eu220.8m.

NH broke out numbers by geography that showed Spain and Portugal suffering a 4.13% drop in revpar and Italy a drop of 8.45%.

Sol reported its revpar numbers along brand lines. The Sol brand, which is 100% resort and 100% in Spain, suffered a 5.1% fall in revpar. Tryp, which is all city and 73% in Spain, suffered a 2.3% drop in revpar. The company said that the Tryp properties in Spain were down 3.2%.

In a presentation to investors during October, Sol said that its share price had been hit by: its exposure to Spanish consumers; cyclicality of the hotel industry; and the perception of real estate.

It argued that it had shown resilience in the past and was positioned to weather the current cycle. It had taken a number of actions this year to help it face the current market: cutting capital expenditure by Eu100m with more reductions going forward; controlled costs by leveraging economies of scale at the corporate level and by standardising brands; being flexible in sales and in particular remunerating distributors based on performance; intensifying its credit control.

It estimated that in 2009, price increases with tour operators in Europe had been limited to between 0% and 2%. In the Caribbean prices had gone up 5%. The biggest challenge was the decrease in the length of holidays.

For its city hotels, which are 47% of hotels EBITDA compared to 53% from resorts, limited price increases were expected for corporate accounts and the challenge was a tightening of corporate travel policies.

The inactive property market also meant that there was little comfort to profits there. Last year asset rotation had contributed 9% to group EBITDA.

During the first nine months of this year, net profits at Sol were down41.7% to Eu80.0m from sales down 3.0%. Analysts at Jeffries remarked that this demonstrated "the operational and financial gearing inherent in the owner-operator business model".

Sol said that the fourth quarter is being negatively impacted by the slowdown in business travel. In September alone, revpar in European city hotels was down by 5.8% and Sol said it expected this trend to continue.

CEO Sebastian Escarrer said current conditions would "not allow us to report positive news for our profit and loss account performance for 2008 nor 2009". But he said that having reduced Sol's debt by Eu350m over the three years to 2007, the company was in an "optimal financial position".

Jeffries is forecasting debt of Eu900m at the year end giving a net debt to EBITDA multiple of 3.6 times. The analysts noted that there were no refinancing concerns in the medium term.

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