Hilton Grand Vacations downgraded by S&P due to high leverage, share repurchases

Published 02/04/2025, 18:00
© Reuters.

Investing.com -- S&P Global Ratings has lowered its credit rating for Hilton Grand Vacations Inc . (NYSE:HGV) to ’BB-’ from ’BB’. This downgrade follows a revision in the base-case forecast for HGV. The rating agency now anticipates that the company’s leverage will remain between 5.5x and 6.0x in 2025, due to lower timeshare sales and higher sales and marketing expenses negatively impacting its EBITDA margins.

The downgrade also reflects HGV’s plans to use cash flow from securitizations over the next two years to partly fund additional share repurchases. This move has led to a reduction in the issue-level rating on HGV’s senior secured debt to ’BB’ from ’BB+’ and on its senior unsecured debt to ’B’ from ’B+’. These ratings have been removed from CreditWatch, where they were placed with negative implications on February 28, 2025.

S&P Global Ratings expects that HGV will maintain a leverage of more than 5.5x through the end of 2025 as it completes the integration of Bluegreen Vacations (NYSE:BXG). While the realignment of its sales and marketing operations is expected to benefit HGV in the long term, the company is likely to prioritize share repurchases over debt repayment in the near term. This strategy is anticipated to result in leverage exceeding its policy target through 2026.

In 2024, HGV ended with an S&P Global Ratings-adjusted leverage of 5.7x, excluding acquisition and integration-related costs. This figure was significantly higher than previously expected, primarily due to consumers reducing discretionary spending and HGV’s increased spending on sales and marketing investments. These investments were made to support the launch of HGV Max, reorganize its sales structure to accommodate recent acquisitions, and attract new buyers. However, HGV prioritized share repurchases over debt repayment during the past year.

Despite increasing marketing efforts, HGV faced challenges in attracting buyers due to a broad pullback in consumer spending behavior. This pullback was triggered by persistently high inflation and increased interest rates. As a result, HGV’s marketing expense, as a percentage of its contract sales, rose to approximately 59% in 2024, up from 55% in 2023 and 48% in 2022.

HGV’s EBITDA generation is expected to be negatively impacted by increased loan loss provisioning to account for the Bluegreen loan portfolio and the weaker ancillary segments of the acquired business. Additionally, the company’s rental margins are anticipated to be negatively affected by the integration of Bluegreen’s rental operations, which generate very low or negative margins.

HGV’s plan to increase its share repurchases, despite its elevated leverage, indicates a shift to a more-aggressive financial policy. The company intends to increase its share repurchases using incremental cash flow from securitizations over the next two years. HGV plans to repurchase approximately $600 million of its shares annually, up from approximately $400 million per year.

HGV has not reduced its net debt after taking on incremental debt to fund its acquisition of Bluegreen Vacations in early 2024. The company issued approximately $1.8 billion of new corporate debt to fund its purchase of Bluegreen. In the revised base case, S&P Global Ratings does not assume HGV will repay any of its debt as it will prioritize shareholder returns.

The negative outlook reflects S&P Global Ratings’ expectation that HGV will maintain a leverage above 5.5x through the end of 2025 as it completes the integration of Bluegreen Vacations. HGV’s ratings could be further lowered if the company’s volume per guest, tour flow, resort occupancy, or EBITDA margin are weaker than forecasted. A ratings increase is considered unlikely at this time, given HGV’s current leverage and its plan to use incremental cash flow for share repurchases.

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