Fitch Ratings has affirmed the Issuer Default Rating (IDR) of
Additionally, Fitch has downgraded the senior secured term loan and revolver to 'BB+'/'RR2' from 'BBB-'/'RR1' and affirmed the senior unsecured notes at 'BB'/'RR4'. The Rating Outlook is Stable.
The affirmation follows the announcement by HGV that it plans to acquire
The Stable Outlook reflects HGV's strong FCF growth and potential debt reduction.
Key Rating Drivers
Bluegreen Acquisition: HGV announced that it intends to acquire
HGV plans to issue secured debt to fund the acquisition, which will increase EBITDA leverage slightly above Fitch's downgrade sensitivities. The expectation is that FCF will be used to reduce debt to bring leverage within sensitivities over time. Fitch points to the rapid deleveraging that occurred following HGV's acquisition of
Variation from Published Criteria: Since the
Fitch considers the cash generated by HGV's wholly-owned consumer financing subsidiary, which flows up directly to HGV, to be accessible, stable and sustainable. Therefore, its inclusion better depicts the company's true operating position as this cashflow supports HGV's ability to service debt and finance its operations.
Recovery Criteria Revision: In
FCF Growth Driving Deleveraging: Strong growth in HGV's EBITDA and FCF since 2021 resulted in debt reduction and improved leverage metrics. Fitch's EBITDA leverage declined to 2.8x in 2022 from 5.3x in 2021 and is expected to remain in the low mid-3x range during the forecast horizon. Fitch's leverage calculation includes an adjustment to ensure proper capitalization of the company's captive finance operations, which is zero for 2023, given the abundant timeshare receivable assets over securitize receivable debt.
HGV has a company-defined public net adjusted EBITDA/debt target of 2.0x-3.0x. HGV's net leverage as of
Resiliency in Downturn: Despite a 71% drop in net sales of vacation ownership interests (VOI) in 2020, HGV generated positive FCF from recurring revenue sources, including consumer financing, club management and rental and property management fees. Recurring revenue represented 42% of total revenue in 2Q23. Low capital spending and the ability to manage inventory on a just-in-time basis provide flexibility during a downturn.
Timeshare receivables experienced a default rate of 8.9% in 2021 and 6.3% in 2020, and reached 6.0% during the global financial crisis. In a default, HGV typically retains ownership of the VOI, which it can rent or sell to another customer. Thus, loan losses are relatively low despite high default rates. In addition, the weighted average FICO score of 736 out of a potential of 850 as of
Well-Positioned in a Competitive Industry: HGV is a top three timeshare operator based on owner families, which provides economies of scale and facilitates third-party marketing relationships. HGV is well-positioned within the high-end spectrum of the timeshare industry and has a diversified portfolio of vacation ownership brands. The integration of
Derivation Summary
HGV's ratings reflect its leading position in timeshares, its strong brand affiliation and network and its robust liquidity due to limited near-term debt maturities. The discretionary and cyclical nature of timeshare sales balance the ratings.
HGV is one of the nation's largest timeshare operators, with approximately 525,000 members in its system.
HGV's revenue is less diversified than that of TNL and VAC, which own the
Under Fitch's Corporate Rating Criteria treatment for corporate issuers with captive finance subsidiaries, Fitch calculates an appropriate target debt-to-equity ratio for the finance subsidiary based on its asset quality, funding and liquidity. If the finance subsidiary's target debt-to-equity ratio, based on Fitch's calculations, is lower than the actual ratio, Fitch assumes that the parent injects additional equity into the finance subsidiary to bring the debt-to-equity ratio to the appropriate target level. Fitch assumes that the corporate entity (HGV) funds the capital injection with an increase in gross debt, a reduction in cash, or a combination of the two. On an as-reported basis, Fitch considers the effect of this equity injection in its analysis of HGV's credit profile vis-a-vis an increase in gross debt.
For HGV's captive finance subsidiary, Fitch calculates an appropriate target debt-to-equity ratio of 1.0x, in line with the actual ratio at
Given HGV's strong FCF profile, Fitch expects cash will accumulate through the forecast years, despite an assumption of share buybacks. HGV has maintained strong cash and cash equivalents, which provides ample liquidity to fund working capital requirements.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
Revenue and net VOI sales pro forma for the Diamond acquisition reach approximately 100% of fiscal 2019 levels by 4Q23, with flat to low-single-digit growth in the forecast;
EBITDA margins maintained at approximately 27% through 2026;
Base interest rates applicable to the company's outstanding variable rate debt obligations reflect SOFR forward curve;
Inventory spending of
Share buybacks of
No material acquisitions or dispositions through 2026 other than the proposed acquisition.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Greater diversification by business line or scale through material increase in owner families;
EBITDA leverage sustaining below 2.5x;
Evidence of through-the-cycle sustainability in the company's capital-light inventory sources such that it does not materially affect HGV's financial flexibility and operational strategy.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage above 3.5x;
Severe disruption in the asset-based securities markets such that HGV needs to provide material support to its captive finance subsidiary;
Material decline in profitability, leading to EBITDA margins sustaining around 15%;
Consistently negative FCF.
Liquidity and Debt Structure
Strong Liquidity, Limited Near-Term Maturities: At 2Q23, HGV had
Because HGV relies on the asset-backed securities market to help fund its timeshare customer lending activities, Fitch notes that a significant economic downturn resulting in tightened credit markets could pressure HGV's securitization market access and potentially require it to support its finance subsidiary. This risk is mitigated by the company's
HGV completed a
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
LT IDR
BB
Affirmed
BB
senior unsecured
LT
BB
Affirmed
RR4
BB
senior secured
LT
BB+
Downgrade
RR2
BBB-
Hilton Grand
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