OREANDA-NEWS. Fitch Ratings has affirmed Expedia, Inc.'s (Expedia) Issuer Default Rating (IDR) at 'BBB-'. Fitch has also affirmed Expedia's senior unsecured credit facility and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.


The affirmation reflects Expedia's solid credit profile and reasonably conservative balance sheet, offset by ongoing competitive pressures and event risk concerns. The company has significant exposure to economic cyclicality through its impact on travel demand. However, this is countered by the secular tailwinds as an increasing mix of travel reservations are being made through online travel agencies (OTAs).

Fitch calculates leverage at June 30, 2016 of 2.1x, pro forma for the annualized impacts of the Orbitz and HomeAway acquisitions and Orbitz-related cost synergies. There is headroom for leverage to spike above 2.0x due to strategic acquisitions as long as Fitch views the transaction as favorable and is comfortable that leverage will be reduced over the one-to-two year Stable Rating Outlook horizon. Both acquisitions fall within this context; however, there is less headroom for any additional leveraging transactions, including material debt-funded acquisitions or return of capital to shareholders, until leverage declines back below 2.0x (Fitch forecasts this to occur by year-end 2017).

Fitch views the HomeAway acquisition positively as it gives Expedia a foothold into the growing alternative lodging space and increased inventory by over 1.2 million properties. HomeAway is a market leader for vacation and secondary residence rentals, but could more directly compete with Airbnb in the future by increasing urban and primary residence inventory. The transition to a more online booking marketplace and the introduction of the approximately 6% traveller fee will help EBITDA grow from $125 million in 2015 to an estimated $315 million by 2018. Expedia's estimates EBITDA of $350 million in 2018 for HomeAway, which is reasonable in our view; however, Fitch's forecast likely includes more conservative assumptions around bookings growth, monetization rate, and margin given the timing considerations and execution risk. Expedia's decision to fund the $3.6 billion acquisition partially with equity was also viewed favorably as it underlines the company's commitment to its conservative financial policies.

The 'BBB-' IDR and Stable Outlook take into consideration ongoing competitive pressures OTAs face, including recent pressures coming from hotel suppliers' ambition to drive more bookings through their own direct channels and increase bargaining power via consolidation. While commission rates in general have been declining over the last decade, bookings growth has remained solid and early indications show no disruption to this trend from the hotel suppliers' efforts. In the long term, Fitch believes the OTAs will remain a valuable channel for suppliers given the operating flexibility they provide and ability to quickly fill hotel vacancies, especially during periods of weakness.

Offsetting the competitive pressures are the secular tailwinds that the OTAs are benefitting from as more travel reservations are booked online and through mobile devices - two platforms OTAs continually invest heavily in (Expedia has spent nearly $4 billion on technology R&D since 2007). Penetration of online travel is highest in mature travel markets like the United States and Europe; however, long-term growth opportunities exist in the Asia Pacific and Latin American markets. China also represents a long-term opportunity; however, Expedia's strategy towards China remains opaque following the sale of its stake in eLong in 2015. Expedia has commercial agreements in place with Ctrip and eLong in China, though the exact terms are unclear.

Over half of Expedia's revenues are generated under a merchant model and the company's continued growth has seen the Fitch-defined working capital deficit grow to $5.5 billion as of June 30, 2016, which could become a use of cash in a slow growth or negative revenue environment. Expedia has historically kept sizeable cash balances and revolver availability as sources of liquidity to partially offset this balance. Under varying stress scenarios, Fitch believes Expedia's $2.3 billion in cash and $1.5 billion in revolver availability are more than adequate liquidity sources to offset the cash impact of a working capital swing.

Liberty Interactive's (Liberty) controlling voting stake of 52% remains an overhang for the credit profile and the pending split-off of Liberty's Expedia shares to a newly created entity (SplitCo) increases the likelihood, in Fitch's view, that Expedia will eventually repurchase the shares owned by Liberty through a combination with SplitCo. Fitch previously affirmed Expedia's 'BBB-' IDR in March 2016 following the review of SplitCo and the transaction will not impact Expedia's financial policies, including its tendency to operate around 2.0x leverage. Expedia's funding strategy and the control premium required to purchase SplitCo's super voting Expedia shares are key unknowns related to a possible Expedia/SplitCo combination.

Fitch sees no immediate change to the corporate governance issues surrounding Chairman Barry Diller's effective control of the company as a result of the SplitCo transaction. Mr. Diller controlled approximately 54% of the outstanding total voting power of Expedia through his personal Expedia holdings and holdings of Liberty, which Mr. Diller has voting control through an irrevocable proxy granted by Liberty.


--Strong revenue growth in the double-digit range driven by organic growth and strategic acquisitions (Orbitz & HomeAway).

--EBITDA margins hold steady around 17% through leveraging of fixed costs on aggressive revenue growth offset by the levels of investments in sales and marketing expense that support a longer term view.

--Free cash flow (FCF) generation increases from nearly $500 million in 2015 to $1.4 billion in 2019 due primarily to EBITDA growth.

--Major uses of cash during the forecast period are funded with a mix of operating cash flow and additional debt raised as the company maintains gross leverage metrics at or below 2.0x.

--Cash uses include $500 million in maturities in 2018 and $600 million in new headquarters capex spending during 2016-2018.

--Acquisitions resume in 2017 after the integration of Orbitz and HomeAway are complete and are $400 million annually.

--Capital returned to shareholders includes $140 million-$200 million in annual dividends and $500 million in annual share repurchases.


Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Positive rating action will likely be forestalled for the foreseeable future due to minimal business considerations to support the company maintaining a rating above 'BBB-' and certain secular challenges. These include an intensifying competitive environment, shifting consumer behaviors, and technological shifts. However, a more conservative financial profile coupled with increased revenue diversification from the growth of the Egencia segment and Ad and Media revenues could have positive implications for the rating.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--An increase in expected volatility in profitability, potentially due to greater volatility in travel services demand or a higher fixed-cost component to Expedia's financial model;

--A secular decline or deterioration in the OTA business model, potentially the result of a shift to direct bookings with travel providers;

--A more aggressive financial policy, reflected through material debt-funded acquisition, share repurchase, or dividends that drive leverage sustainably above 2.0x.


At June 30, 2016, Expedia had $2.3 billion in cash and generated $599 million in Fitch-defined FCF during the latest 12 months (LTM) period. With FCF expected to grow from $500 million in 2016 to $1.4 billion by 2019 and the Orbitz/HomeAway acquisitions complete, Fitch believes Expedia will be able to resume capital returns to shareholders at a pace similar to 2014 while maintaining leverage around 2.0x or below. Dividends should continue to grow at a consistent pace and Fitch assumes $500 million in annual share repurchases. If operating performance weakens, Fitch expects Expedia would consider reallocating capital from share repurchases to debt reduction in an effort to remain within the current rating.

Total debt as of June 30, 2016 was $3.2 billion and consisted of senior unsecured notes maturing from 2018-2026. Expedia also has a $1.5 billion undrawn revolver that matures February 2021.


Fitch has affirmed the following ratings:

Expedia, Inc.

--IDR at 'BBB-', Outlook Stable;

--Senior unsecured credit facility at 'BBB-';

--$500 million in 7.456% senior unsecured notes due 2018 at 'BBB-';

--$750 million in 5.95% senior unsecured notes due 2020 at 'BBB-';

--EUR650 million in 2.5% senior unsecured notes due 2022 at 'BBB-';

--$500 million in 4.5% senior unsecured notes due 2024 at 'BBB-';

--$750 million in 5% senior unsecured notes due 2026 at 'BBB-'.