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Any Reservations for Park Hotels’ New Note Sale?

By:

Senior Market Analyst at Interactive Brokers

Park Hotels & Resorts (NYSE: PK) was set Tuesday to sell US$500m worth of new notes to bolster liquidity, as corporate bond investors continue to snap-up deals despite fundamental credit concerns.

The Virginia-headquartered, hotel-focused real estate investment trust (REIT) entered the primary market with a fresh, senior secured debt offering, as the firm – and overall U.S. hospitality industry – suffers from ongoing Covid-19-inflicted travel restrictions and related plunge in tourism.

Hospitality and lodging stocks suffer pandemic related downturn

Park Hotels said it intends to use the proceeds from the sale for general corporate purposes, as well as to repay amounts outstanding under its fully drawn US$1bn revolving credit facility, amid still ultra-low U.S. interest rates.

The yield on the 10-year U.S. Treasury note was last bid at around 0.705% – a decline of roughly 118 bps since the start of the year.

Park Hotels’ issuance also falls amid a recent spike in U.S. corporate bond market activity – especially after the Federal Reserve rolled out a series of unprecedented measures to support credit, as well as the broader economy and financial system, in the wake of the novel coronavirus-led lockdowns.

The latest debt offering from Park Hotels joins a growing list of other issuers, such as cruise line operator Carnival Corp (NYSE: CCL) and Marriott International (NASDAQ: MAR), whose creditworthiness has been increasingly pressured by government-mandated policies to contain the spread of Covid-19.

corporate bond issuance surges in 2020 YTD YoY

Over the past three months, five-year credit default swap (CDS) spreads on Carnival, for example, have blown out by more than 1,030 basis points to just north of 1,179.5 bps, while costs for credit protection against Park Hotels has suffered a 256 bp-rise to 371 bps.    

Hotel Reservations

Indeed, Park Hotels’ debt-fueled funding appears to exemplify the need to sustain operations in the hospitality business, amid the threat of a complete collapse in U.S. occupancy rates and associated revenue per available room (RevPAR).

In the first quarter of 2020, the company posted a 20.2% year-on-year plunge in total RevPAR to US$218.17, while incurring a net loss of US$689m.

Among other measures, the REIT said it suspended operations at 38 of its 60 hotels due to disruption from Covid-19, along with consolidating activity at certain of its other hotels that remain open – effectively reducing available rooms to 15% of full capacity.

The company also said it fully drew-down on its US$1bn revolver “as a precautionary” tactic, resulting in a cash and restricted cash balance of US$1.3bn as of the end of March – of which US$105m was used to pay its April 15 dividend.

To further shore up liquidity, Park Hotels in May amended its credit and term loan facilities to suspend all financial covenants through March 31, 2021 and extended the maturity on its revolver to December 2021. The firm also established a baseline cash burn rate of around US$70m per month, assuming all hotels have suspended operations.

Park Hotels & Resorts’ CEO Thomas Baltimore said that with his firm’s portfolio currently operating at only 15% of capacity, hotel operating expenses have been slashed by an estimated 75%, while the 2020 capex budget was also cut by around 75%.

Baltimore continued that his management team has “managed several disruptive events” throughout their careers, including natural disasters, 9/11 and the Great Recession, and added that with US$1.2bn in liquidity, and the cash burn rate of US$70m per month, “in an extreme situation with all operations suspended, Park is well positioned to navigate the disruption from the COVID-19 pandemic.”

Room Key Risks

However, not all analysts are convinced that the company’s ability to honor its future debt obligations will remain stable.

S&P Global Ratings, which assigned a ‘B’ issuer credit rating to Park Hotels & Resorts, and a ‘BB-‘ issue-level rating to the newly proposed 5-year note sale, maintains a negative outlook on the deal.

S&P analyst Jing Li said the outlook largely reflects anticipated stress on revenue and cash flow, as well as uncertainty over the path of recovery over the two next years as “Park copes with significantly reduced hotel demand.”

Li further outlined other key risk factors, including Park’s material exposure to gateway and resort destination markets such as Hawaii, San Francisco, and Orlando, where non-resident visitor quarantines, airline travel restrictions, tourism shutdowns, and bans on large gatherings have spurred closures at most of its hotel properties.

Park Hotels recently said its Hilton Orlando property – an unconsolidated joint venture – has remained open, supported by demand from the National Guard.

Li also observed that around 25% of 2019 property-level EBITDA was generated by assets in Hawaii, “a fly-to destination that may recover more slowly than drive-to markets as leisure consumers and business transient travelers gradually build confidence they can travel safely.”

Park’s revenue exposure to business transient and group travel was about 60% in 2019.

Meanwhile, S&P Global estimates that the REIT should have “ample” liquidity for at least 22 months after incorporating the new 5-year note issuance. However, the ratings agency expects Park’s leverage to be “very high” in 2020, with the potential to improve to the 7.5x-8.5x range in 2021, if U.S. travel demand and consumer activity recovers.

Shares of Park Hotels & Resorts have plummeted more than 65.5% to date in 2020 and were last trading at around US$9.20 intraday Tuesday.

Extended Stay

Covid-19-led restrictions in the U.S. have already decimated the domestic economy, while uncertainties persist over the length and path of government lockdown policies – further stifling the lodging industry’s efforts to plan reopening.

10 year us treasury rates have fallen around 118 bps YTD

Against this backdrop, corporate bond investors’ appetite for higher yielding assets remains voracious despite ongoing worries about longer-term fundamental consequences stemming from the coronavirus crisis.

Nuveen analysts Bill Martin and John Miller noted that the U.S. junk bond market traded around 32 bps lower last week, with fears about Covid-19 and the release of more abysmal economic data setting the tone – core consumer goods, for example, had witnessed the worst monthly decline on record, dating back to February 1957.   

Nuveen added that although the Fed recently began purchasing investment-grade bonds, initial buying was reportedly minimal, “making the program’s impact more psychological than economic – for now.”

Still, for the week ending May 13, Refinitiv U.S. Lipper Fund Flows reported net inflows of more than US$5.2bn into investment-grade funds, while high yield funds received roughly US$4.5bn – culminating in a two-week total of US$11.8bn and US$8.0bn worth of inflows, respectively.

For more insights, use the global bond scanner in the IBKR Trader Workstation to locate corporate bonds that are available to trade in the secondary market, along with U.S. Treasuries, municipal bonds, non-us sovereign debt and more.

IBKR Trader Workstation Bond Scanner
Disclosure: Interactive Brokers

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