Starwood’s Bonds Pay Investment-Grade Yield: Corporate Finance

Jan. 10 (Bloomberg) — Starwood Hotels Resorts Worldwide Inc., owner of the St. Regis and W brands, is getting an upgrade in the credit markets as investors anticipate its departure from junk status with rising earnings outweighing stock buybacks.

Credit-default swaps on Starwood have fallen to levels that imply its debt should be rated Baa2, the second-lowest step of investment grade, according to Moody’s Corp.’s capital markets research group. Starwood bonds now yield less than similar- maturity BBB grade debt, Bank of America Merrill Lynch index data show. The Stamford, Connecticut-based company is rated Ba1 by Moody’s Investors Service and BB+ at Standard Poor’s. It hasn’t held an investment-grade rating since March 2009.

Starwood, which retired all its debt due in 2012 last month, is benefiting from earnings that have beaten analysts’ estimates in the last two quarters as high-end hotels in major U.S. cities fare best amid a recovery in business travel. An upgrade would put it at the BBB level along with hoteliers Marriott International Inc. and Wyndham Worldwide Corp.

“The $250 million share repurchase program doesn’t offset what they’ve done on a deleveraging basis over the last couple of years, so we’re confident they’ll move to investment-grade status,” said Troy Johnson, a money manager who helps oversee $4.5 billion of fixed-income investments at Denver Investments. “Using cash to take out those bonds versus rolling them in the market was probably the latest indicator that they should attain investment-grade status fairly soon,” Johnson said in a telephone interview from Denver.

Falling Yields

Jason Koval, a spokesman for the company, did not immediately respond to a telephone call seeking comment.

Leverage, measured as the ratio of total debt to trailing 12-month earnings before interest, taxes, depreciation and amortization, rose as high as 4.2 times in 2009 from 2.3 times in 2006, according to data compiled by Bloomberg. It fell to 3.5 times at the end of the third quarter of last year, the data show.

Starwood’s $450 million of senior unsecured 7.375 percent notes maturing in November 2015 climbed to 112.5 cents on the dollar to yield 3.846 percent on Jan. 5, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with an average yield of 3.952 percent for BBB rated debt maturing in three to five years, Bank of America Merrill Lynch index data show. BB rated debt due in 10 years or less, which has an average maturity of 5.9 years, yielded 6.21 percent.

The extra interest investors demand to hold Starwood bonds overall instead of comparable-maturity Treasuries was 3.73 percentage points yesterday, the lowest of four issuers in the Bank of America Merrill Lynch U.S. High Yield, Hotels index, whose spread is 3.91 percentage points.

Implied Rating

The cost to protect Starwood’s debt from default eased to the cheapest since Aug. 3. The credit-default swap contracts, which typically decline as investor confidence improves, fell to 166.3 basis points as of 11:25 a.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s down from 338.8 basis points on Oct. 4. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Those prices imply the debt is rated Baa2, Moody’s data show. The contracts, which pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, have signaled Moody’s should lift it from junk since Oct. 5.

Moody’s has graded the company’s debt Ba1, the highest step of speculative grade, since March 2009, Bloomberg data show. Starwood senior debt has been rated BB+ by Standard Poor’s since October 2010 and BB+ at Fitch since February 2009, the highest speculative-grade ratings. Both have a positive outlook.

Adequate Liquidity