OREANDA-NEWS. S&P Global Ratings today said it assigned its 'BB+' issue-level and '1' recovery rating to Charlotte, N. C.-based Extended Stay America Inc. subsidiary ESH Hospitality Inc.'s proposed $1.65 billion senior secured credit facility (consisting of a $350 million revolver due 2021 and a $1.3 billion term loan due 2023). The '1' recovery rating reflects our expectation for very high (90% to 100%) recovery for lenders in the event of a default. The company will use the proceeds to repay in full its $1.5 billion mortgage loan.

The 'BB-' corporate credit rating on Extended Stay is unchanged. The outlook is stable.

The 'BB-' issue-level rating and '3' recovery rating on ESH Hospitality Inc.'s $1.3 billion 5.25% senior unsecured notes due 2025 are also unchanged. The '3' recovery rating indicates our expectation for meaningful (50% to 70%; upper half of the range) recovery for lenders in the event of a default.

"The ratings reflect our expectation for anticipated improvement in operating performance that enables the company to sustain total adjusted debt to EBITDA below 5x and FFO to total adjusted debt above 12% through 2017," said S&P Global Ratings credit analyst Daniel Pianki.

Despite the slowdown in U. S. revenue per available room (RevPAR) in the first half of 2016, and our lowered base-case U. S. RevPAR forecast to a range of 2% to 4% (from 3% to 5%), we expect a continuation of good operating fundamentals in the lodging industry and expected returns from renovation capital spending at Extended Stay will drive a moderate increase in revenue and EBITDA in 2017, resulting in a good cushion through 2017 compared to our 5x adjusted debt to EBITDA and 12% FFO to total debt thresholds at which we could lower ratings. Specifically, we expect adjusted debt to EBITDA to be in the mid-4x area in 2016 and to improve to around 4x in 2017 and for FFO to adjusted debt to be in the mid-teens percentage area over the same periods, in line with our aggressive financial risk assessment.

The stable outlook reflects our expectation for sustained improvement in operating performance that enables the company to maintain a good cushion compared to total adjusted debt to EBITDA below 5x and FFO to total adjusted debt above 12% thresholds over the next two years. In addition, we expect EBITDA coverage of interest expense to remain good, above 4.5x, over the same period.