Moody’s Eyes War Impact On Hotels

NEW YORK— In a special investors’ teleconference yesterday, rating agency Moody’s indicated the impact of the U.S. war with Iraq on hotel-related credit ratings will vary by segment, sector and company. Operating performance in the lodging industry was still soft as a result of 9/11 and the weak economy as war with Iraq commenced said Moody’s in a statement. “Provided the war is short, ratings for most large lodging corporations and for commercial mortgage backed securities (CMBS) should hold, although some highly leveraged hotel companies and real estate investment trusts (REITs) could come under more rating pressure,” noted hospitality analysts within Moodys. According to a report from Reuters, Bill Fahy, analyst for speculative grade hotels, said the conflict in the Middle East, however short, will likely crimp hotels operating performance in the near term, and noted maintaining adequate liquidity through these difficult times is crucial. For hotel operators, Moodys investment grade lodging analyst Peggy Holloway said lower GDP growth, declining consumer spending, and anemic corporate profits were already impacting demand, and the war will force RevPAR down even further for a short time. If the war is short room demand is expected to bounce back, but only to the weaker levels that existed before the conflict began, she said. Holloway also noted that cost cutting may have reached its limits and “management companies cannot sustain current levels of cost controls in 2003 if they want to maintain a competitive position,” the report said. The war with Iraq comes just as hotels approach their busy spring season when they build up cash reserves after a slower winter season, the report noted. “To the extent that a war with Iraq does not last longer than a few months, it will not have a significant impact on CMBS deals that we rate,” said E. J. Park of Moodys commercial mortgage-backed securities group. But, the analyst advised, “a prolonged military conflict or any additional terrorist attacks on U.S. soil may have negative credit implications as hotels have been under stress for the last two years,” according to Reuters. Looking at how the war will affect REITs, analyst Lesia Bates Moss said, “because most lodging REITs credit ratings and profits are weak, a prolonged ailing economy and long war would result in further downward pressure on credit ratings.” The REITs involved in the lodging sector overall are below investment grade, and have about $9 billion of rated debt outstanding, the report indicated. A number of factors could help mitigate near-term stress; among them is a slowing in the expansion of hotel rooms, which should grow only 1.5% in 2003, compared to 1.8% growth in 2002, allowing many hotel companies to benefit from increased demand when the economy rebounds. SOURCE: Reuters