Fitch Ratings-Paris/London-31 January 2019: Fitch Ratings has assigned Accor SA's (Accor; BBB-/Positive) EUR500 million undated deeply subordinated fixed to reset rate NC 5.25 bonds a 'BB' final rating, and EUR600 million 1.75% bonds due 4 February 2026 a 'BBB-' final rating.



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The senior unsecured notes are rated at the same level as Accor's Issuer Default Rating (IDR) as they rank pari passu with its other senior unsecured borrowings.

The hybrid issue is deeply subordinated and ranks senior only to Accor's share capital, while coupon payments can be deferred at the discretion of the issuer. As a result the 'BB' rating is two notches below Accor's IDR, reflecting the notes' higher loss severity and risk of non-performance relative to senior obligations.

The securities qualify for 50% equity credit as they meet Fitch's criteria with regard to subordination, remaining effective maturity of more than five years, full discretion to defer coupons for at least five years and limited events of default. Deferrals of coupon payments are cumulative and there are no look-back provisions.

The hybrid is callable 5.25 years after its issue date (first-step-up date) and every year subsequently on any interest payment date. There will be a coupon step-up of 25bp at the first-step-up date and an additional step-up of 275bp 20 years thereafter. The deeply subordinated bonds are perpetual notes with no legal maturity date.

Both instruments have been launched in the context of liability management and do not change the overall debt amount. The senior notes will be used to refinance senior bond maturities for a total EUR685 million. The hybrid instrument will be used to finance the tender offer for the currently outstanding EUR900 million hybrid instrument (EUR386 million), while the company has stated its intention to maintain the current amount of hybrid debt (EUR900 million) in its capital structure. The new hybrid issue ranks pari passu with any remaining portion of the existing hybrid instrument.

KEY RATING DRIVERS
Resilient Asset-light Business Model: After the completion of the sale of 65% of AccorInvest (AI, the entity owning or leasing the hotels), to institutional investors in 2018, Accor's business model is mostly asset-light, with long-term assets essentially made up of goodwill and other intangibles such as trademarks. This asset-light model will mirror that of other US lodging groups. The recurrent fee nature helps mitigate revenue and EBITDA volatilities in a sector, which remains cyclical and subject to sharp moves in occupancy rate and/or pricing.

We view the recent acquisition of 33% of Orbis's shares, increasing Accor's ownership in Orbis to 85.84%, as a continuation of this transformation through further potential monetisation of assets.

Broad Geographic Diversification: Europe, including France and Switzerland, currently accounts for over 50% of total fee revenue and remains Accor's core market. The company's growth plans lie mainly in Asia, as illustrated by the Mantra acquisition in Australia in October 2017. This geographic diversification strategy is positive for the rating, as it mitigates a potential decline in a particular region. Accor has a very modest presence in the US, which is not a target area for the company given the competitive landscape.

Expected Leverage Increase Temporary:  Despite the lower cost of debt, Fitch estimates that Accor's funds from operations (FFO) adjusted gross leverage will increase temporarily, due to the separation of AI and the expected transformation of Accor to being mostly an asset-light hotel operator. The level of cash left in the business, which Fitch would view as readily available for debt service instead of being earmarked for acquisitions or shareholder remuneration, should remain at a minimum of EUR1 billion, even with the increase in Orbis's ownership from 53% to 86% for EUR338 million. The substitution of room revenue by fees will lower FFO generation, increasing the FFO-adjusted leverage ratios.

We initially expect a wide gap between gross and net FFO leverage metrics (above 5x and 1.2x respectively for 2018). Gross leverage should decline when the company has completed its transformation to an asset-light operator.

Strengthened Position in Luxury Segment: We believe Accor's strategy of moving more upmarket would make the company's business model more competitive relative to disruptive hospitality operators, as demonstrated by the Movenpick and SBE acquisitions in April and June 2018. Premium and upscale hotel guests (both business and leisure) are generally willing to pay for high quality services (e.g. fine-dining, 24-hour room service, valet parking, fitness centres, spas, reliable internet and security conditions) that Airbnb does not offer. In 2017, around 40% of management fees were from the luxury segment, and Accor is working to increase this proportion.

Execution Risk in Large Acquisitions: Accor has been acquisitive over the recent years, as illustrated by the FRHI acquisition in 2016, for around EUR2.8 billion, a milestone acquisition significantly reinforcing Accor's presence in the luxury segment or the Mantra acquisition. Accor still plans to make some acquisitions with the cash received from the sale of AI. There are execution risks around such a dynamic acquisitive strategy. However, if they are value-accretive and solidify the business model they could contribute to a potential upgrade of the IDR to 'BBB'. Accor's strongly stated commitment to remain investment-grade is also a positive rating factor, which limits the risk of overpaying acquisitions or materially increasing leverage.

New Businesses Improve Service Offering Diversification: Fitch expects Accor will remain very active in small-sized strategic acquisitions in digital, alternative accommodation and premium service businesses. Accor carried on acquiring new businesses for a total of over EUR550 million during 2016-2018 and Fitch believes that such momentum will continue for bolt-on acquisitions adjacent to its hotel business.

DERIVATION SUMMARY
Accor's IDR is well-positioned relative to European competitors Melia Hotels International, NH Hotel Group SA (B+/Positive) and Radisson Hospitality AB (B+/Stable) on each major operating factor. Accor has a slightly weaker competitive position than major global peers like Marriott International Inc. (BBB/Positive) and Intercontinental Hotel Group, based on numbers of rooms and geographical diversification, although it continues its expansion across all continents.

KEY ASSUMPTIONS
Fitch's Key Assumptions Within our Rating Case for the Issuer
- Revenue growth in the mid-single digits, driven mainly by new room openings.
- EBITDA margin stable at 24%.
- EUR240 million of capex per year, as per Accor's guidance.
- Acquisitions of around EUR1.4 billion over 2019-2021 (excluding the Orbis shares).
- Share buy-back programme totalling EUR1.35 billion, spread over 2018-2021 (EUR350 million realised in 2018).

RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- Successful growth of room numbers under management, including through well-targeted acquisitions.
- FFO lease adjusted gross leverage (adjusted for variable leases) sustainably reducing towards 4.0x and lease-adjusted net debt /EBITDAR (adjusted for variable leases) ratio staying below 3x.
- Lease-adjusted EBITDAR/gross interest plus rents ratio of above 2.5x.
- Sustained positive free cash flow (FCF).

Developments that May, Individually or Collectively, Lead to Negative Rating Action
- Impaired room pipeline development and/or cancellation of management contracts and/or large acquisitions outside Accor's core activities.
- FFO adjusted gross leverage (adjusted for variable leases) remaining above 4.5x and lease adjusted net debt/EBITDAR (adjusted for variable leases) above 3.5x beyond 2020.
- Lease-adjusted EBITDAR/gross interest plus rents of below 2.0x.
- Breakeven FCF.

LIQUIDITY
Strong Liquidity: Accor had EUR3.9 billion readily available cash at end-June 2018, which was sufficient to cover EUR138 million short-term debt. The next large debt maturity will be in 2021, when the remaining part of the bond not amortised with the new debt issue is due. Accor reduced its revolving credit facility to EUR1.2 billion in July 2018 after the completion of the AI transaction, reflecting lower operational needs. The ongoing refinancing will cover closer maturities and extend the maturity profile.

Ring-fenced AI: Accor will continue to own 35% of AI until at least 2023, but its debt (total liabilities at 2017 of EUR1,526 million including EUR234 million of financial debt) is totally ring-fenced from Accor's debt and Accor is not liable for it.

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