Fitch Affirms Marriott's IDR at 'BBB'; Outlook Stable

Fitch Ratings has affirmed Marriott International Inc.'s (Marriott) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of the release.

Positive Industry Fundamentals

The affirmation of Marriott's ratings is partly attributable to Fitch's positive 1 - 3 year outlook for the lodging industry. Strong corporate and leisure transient demand and limited new supply support Fitch's base case scenario of 5.5% U.S. industrywide RevPAR growth in 2014, led by ADR growth.

Fitch expects Marriott's systemwide RevPAR to grow at or below our 5.5% U.S. industrywide projection, consistent with the mid-point of company guidance for 4% - 6% RevPAR growth in 2014 both in North America and worldwide.

Fitch believes the U.S. lodging industry is in the middle innings of this recovery, based on a comparison with the previous two that occurred in the early 1990s and 2000s. Although the trajectory of the current recovery has been unusually strong, an examination of the length of prior cycles suggests this one has not yet run its course. Real RevPAR remains approximately 8% below prior peak levels. Fitch expects RevPAR to comfortably exceed the prior cycle peak, as it did during the previous two cycles.

Stronger group demand could result in RevPAR exceeding Fitch's 2014 forecast. Fitch believes this would disproportionately benefit Marriott given its expertise in managing large group oriented hotels. Group demand, defined as rooms booked in blocks of 10 or more, has lagged so far during this recovery due to cyclical and secular challenges, in Fitch's view.

Fitch expects U.S. hotel supply to increase by 1.1% during 2014. This represents a modest acceleration from roughly 0.7% supply growth for 2013, but is still well below the 2% annual industry average since 1988. The low level of new supply supports our outlook for a stronger and longer upswing in this lodging cycle.

Fitch views external factors, such as an unanticipated material deterioration in the U.S. economy, as the principal near-term risk to its forecast. Occupancy declines have historically been a good early warning indicator - particularly when combined with an environment of solid ADR-led RevPAR growth and expectations for elevated new supply.

Marriott's ratings incorporate Fitch's current macroeconomic outlook, including annual U.S. GDP growth of 1.6%, 2.6% and 3.0% in 2013, 2014 and 2015, respectively. We expect the global economy to grow by 2.3%, 2.9% and 3.2% during the same respective periods.

Recognizing the cyclical nature of the lodging industry, Fitch believes Marriott is well positioned to withstand softer economic conditions than those contemplated in Fitch's base case expectations.

Leverage at Target Levels

Fitch expects management to maintain credit metrics in line with a 'BBB' rating. Fitch calculates LTM (latest 12 months) 3Q'13 lease-adjusted leverage of 2.85x (adjusted for calendar change), which is unchanged from year-end 2012.

Consistent with Fitch's expectations, Marriott has focused its capital allocation policies on growth initiatives and shareholder-friendly activities. The company bought back $628.8 million of shares through Sept. 30, 2013. It also increased its quarterly common dividend by 30.8% to $0.17 from $0.13 in May 2013. The ratings assume Marriott maintains capital allocation policies within Fitch's 3.0x target for lease-adjusted leverage.

There is adequate cushion in the rating for cyclical weakness or a leveraging transaction that temporarily brings credit metrics outside of the leverage target, provided Fitch's forecasts indicate that lease-adjusted leverage will return to 3.0x or below within approximately 12 - 18 months.

For a discussion and reconciliation of adjusted credit metrics and contingency risk for U.S. Lodging C-Corps, refer to Fitch's report, 'Inn the Footnotes,' dated Jan. 7, 2011 (link below).

Continued Focus on a Capital-Efficient Model

The ratings consider Marriott's long-term focus on a capital-efficient, asset-light, recurring-fee business model. Fitch estimates that over 90% of the company's revenues (net of direct costs) are generated from fee income, the majority of which includes recurring management and franchise fees.

Marriott continues to demonstrate its commitment to operating under an asset light business model through the sale of owned hotel assets and structuring of brand acquisitions.

On Jan. 7, 2014 the company announced the sale of its London EDITION hotel and agreements for the sale of two other company-owned EDITION hotels currently under development in Miami Beach and Manhattan.

The $815 million total purchase price for the three EDITION hotels approximates the company's acquisition and development costs. Marriott anticipates closing on the sales of the Miami Beach and Manhattan assets as these hotels are completed in 2014 and 2015, respectively.

Marriott purchased these properties to catalyze growth in its luxury EDITION brand. The sales are consistent with the company's stated intention to recycle the capital by selling the properties to a third party under a long-term Marriott management agreement.

The deal structure of Marriott's planned purchase of Protea Hospitality Holdings contemplates creating a separate company not owned by Marriott that will retain ownership of Protea's owned hotels - further evidencing Marriott's commitment to maintaining an asset light business model. The acquisition adds incremental diversification to Marriott's cash flows, making it the largest hotel operator in Africa with over 23,000 rooms on a combined basis.

Marriott's purchase of the Gaylord brand and management company in 2012 (and not the real estate) and its spin-off of its timeshare business to shareholders in 2011 provide additional examples of its commitment to operating under an asset light business model during the last several years.

Liquidity Profile

Marriott's liquidity position is supported by its revolving facility availability of $1.2 billion (less letters of credit and commercial paper outstanding) and cash balance of $144 million at third-quarter 2013. Fitch expects the company to generate free cash flow of roughly $400 million-$500 million in 2014 and 2015, despite the potential for increased investment spending, providing some financial flexibility for continued share repurchase activity.

Given the company's current leverage profile, Fitch does not expect any near-term debt reduction. The company has $790 million of CP outstanding with no material maturities due until its 5.81% Series G notes with $316 million principal matures in 2015. Fitch expects the company to opportunistically access the bond market in late 2014/2015 to 'prefund' the maturity. Marriott also has ample short-term borrowing capacity under its credit facility and CP program to satisfy the obligation.

Marriott's 'F2' short-term IDR and commercial paper ratings reflect the company's 'BBB' long-term IDR, strong cash flow generation and liquidity profile. Further, the short-term and long-term IDRs are supported by the company's capital recycling business model, which provides solid financial flexibility with respect to discretionary capital outlays.

Fitch assigned initial ratings to Marriott RHG Acquisition B.V. (RHG) as detailed below. Based in Amsterdam, Netherlands, RHG is a wholly-owned subsidiary of Marriott that is an authorized borrower under its credit facility and commercial paper (CP) program. CP issued by RHG is fully and unconditionally guaranteed by Marriott.

SENSITIVITY/RATING DRIVERS

--If Marriott explicitly guides to a more conservative policy with a stated leverage target below 3.0x then a positive rating action would be considered. At this point, Fitch believes it is unlikely given the potential growth opportunities in the lodging industry over the next few years and the company's historical financial policies.

--Fitch expects management to support its balance sheet at a level commensurate with a 'BBB' rating. If management changed its financial policy and chose to manage leverage at a level higher than 3.0x then a negative rating action would be considered.

--In the event of a significant economic downturn, the company could maintain its current rating if it pulled back on investment spending and share repurchases and reduced its CP balance. A negative rating action would be considered if the company chose not to adjust its capital allocation in a downturn scenario.

--A negative rating action could also occur if a downturn is more severe than Fitch's stress case scenarios, which contemplates industrywide RevPAR declines of 13-15%. Due at least in part to the more attractive supply growth environment relative to the last recessions, we believe RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 - 2009.

--Marriott's 'F2' short-term rating is supported by its back-up liquidity coverage from its RCF and sufficient internally generated sources of liquidity to amply cover near-term debt service. If these liquidity measures deteriorate over time, there could be pressure on the 'F2' rating.

Fitch has affirmed Marriott's ratings as follows:

Marriott International, Inc.

--IDR at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2';

--$2.0 billion senior unsecured credit facility at 'BBB';

--$2.2 billion of senior unsecured notes at 'BBB'.

Fitch rates the following:

Marriott RHG Acquisition B.V.

--Short-term IDR 'F2';

--Commercial paper 'F2';

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815460

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