Moody’s slashes bond rating for Downtown Phoenix Hotel Corp. (Sheraton)
[Source: Russ Wiles, The Arizona Republic]
A credit-rating agency has downgraded $350 million worth of bonds issued by the city-affiliated Downtown Phoenix Hotel Corp., reflecting a challenging debut for its Sheraton hotel near the convention center.
The downgrades by Moody’s Investors Service of New York won’t affect the entity’s payments on the bonds, which carry a fixed interest rate.
They also won’t add any pressure on general city finances, said Jeff DeWitt, Phoenix’s finance director, who said bondholders still will be paid in full.
The rating cuts affect three categories of bonds sold in 2005 to develop the Sheraton Phoenix Downtown Hotel, which opened in October 2008:
- The rating on $157 million worth of senior revenue bonds was cut to Ba1 from Baa3, with a negative outlook. That pushes the bonds into a lower-grade or “junk” status.
- The ratings on $164 million of one series of subordinate revenue bonds and $29 million in a second series were both cut to A2 from A1, with a stable outlook.
The bonds were issued to build and furnish the hotel, located north of the convention center.
The two subordinate bonds have different provisions that provide added protection to bondholders from the city. This support derives from sports-facilities taxes, based on hotel and rental-car levies, that the city can apply if hotel revenues aren’t enough to make debt payments.
The three series are revenue bonds backed by cash flow from the hotel.
“They are separate from the city’s general credit,” DeWitt said.
The subordinate bonds are supported by sports-facilities taxes.
The downgrade on the senior bonds reflects lower-than-projected results for the hotel’s first two years of operation compared with what was envisioned when the bonds were sold in 2005.
“The occupancy rate and the average daily rate of the hotel fell significantly below expectations due to the economic conditions at the time of (the) hotel’s initial operating period,” Moody’s analysts wrote in a report. “The downgrade on the subordinate bonds reflects (the) city’s decreased sports-facility taxes.”
Moody’s expects the Sheraton Phoenix Downtown Hotel will continue to struggle over the next 12 to 18 months to boost its occupancy and pricing.
The hotel was just 49 percent full in 2009 compared with a national average of 55 percent. Occupancy at the Phoenix hotel is projected to climb to 56 percent in 2011.
According to Moody’s, the hotel’s 2011 budget assumes an average daily rate of $159 per room – well below the original $182 projection for the 2011-12 period.
DeWitt said the hotel continues to perform well but just not at the levels envisioned in 2005. He cited guest surveys ranking it among the top Sheratons in the nation.
“The hotel opened in a difficult recession,” he said. “I’m confident it will do well when the economy recovers.”
Moody’s noted that the city’s sports-facilities taxes declined in 2009 and earlier in 2010, although they have started to recover more recently.