What impact might the refinancing have on the company’s credit rating and future borrowing costs?

Answer Overview

The $1.5 billion refinancing that DiamondRock Hospitality Company (DR H) completed in Q2 2025 is likely to have a positive impact on the company’s credit rating and on its future borrowing costs. The key reasons are:

Below is a deeper dive into how each element influences credit ratings and borrowing costs.

1. Credit‑Rating Implications

1.1. Lengthened Debt Maturity Profile

• Reduced refinancing risk: Credit rating agencies (Moody’s, S&P, Fitch) place a heavy emphasis on the “refinancing risk” component of a company’s credit profile. By having no debt maturities until 2028, DiamondRock removes a major near‑term liquidity stress point that would otherwise be a “negative” factor in the rating methodology.
  
• Positive rating outlook: The absence of near‑term maturities typically translates to a stable or upgraded rating because the company can focus on operational performance rather than scrambling for liquidity in 2025‑2027.

1.2. Improved Leverage Metrics

• Debt‑to‑EBITDA: The refinancing is accompanied by a raised midpoint for 2025 Adjusted EBITDA and FFO per share guidance. Assuming the same amount of debt but higher earnings, the debt/EBITDA ratio improves, a key metric in rating models.
  
• Coverage ratios: Longer maturities give the company more time to meet interest‑coverage and debt‑service‑coverage ratios, which are often explicit thresholds for rating upgrades (e.g., S&P’s “Debt service coverage ratio >1.5” for an “A‑” rating or higher).

1.3. Liquidity & Covenant Strength

• Cash‑flow cushion: The refinancing likely provided additional cash‑flow flexibility (e.g., a revolving credit facility or an extension of existing term loan). Agencies view an increase in net liquidity and the ability to meet covenant tests as a positive driver.
  

1.4. Share Repurchase Impact

• Equity reduction vs. EPS uplift: Repurchasing 3.6 million shares reduces the equity base, which could marginally increase leverage ratios (Debt/Equity). However, the increase in EPS/FFO per share improves the “return‑to‑shareholder” metric, which can offset the small leverage increase, especially when the underlying cash‑flow metrics are still improving.
  
• Signal of confidence: Agencies also consider management’s confidence in the business when it decides to repurchase shares. This can be interpreted as a positive qualitative factor.

Bottom‑Line on Rating:

All things considered, the refinancing should either maintain the current credit rating (if it was already strong) or generate a modest upgrade (e.g., from B+ to BBB‑ or from BBB‑ to BB) depending on the starting rating, the exact terms of the refinance (interest rate, covenant structure) and how rating agencies weigh the share repurchase.

2. Future Borrowing Costs

2.1. Lower Cost of Capital from the Refinancing Itself

• Lower coupon / improved terms: Companies typically refinance when they can secure a lower coupon or more favorable covenant structure. If the $1.5 billion was refinanced at a rate lower than the prior debt, the weighted‑average cost of debt (WACD) drops immediately.
  
• Higher credit rating (if upgraded): A higher rating directly translates to lower yields on new debt issuance. For example, a move from a “BB” rating to “BBB‑” can cut the spread on a corporate bond by 50–100 basis points (bps) depending on market conditions.

2.2. Reduced “Liquidity Premium”

• No near‑term maturities: Investors require a liquidity premium (higher yield) when a company faces a large repayment in a short time frame. By eliminating any debt due before 2028, DiamondRock eliminates this premium for the next few years.
  

2.3. Potential for Lower‑Cost Financing Options

• Access to longer‑term debt markets: The extended maturity horizon makes the company eligible for longer‑term fixed‑rate debt (e.g., 10‑year or 15‑year bonds), which generally have lower yields than short‑term financing.
  
• Improved covenant flexibility: If the refinance introduced covenant-lite or “non‑financial covenant” structures, the cost of monitoring and compliance for lenders drops, potentially allowing DiamondRock to negotiate better terms in future issuances.

2.4. Impact of Share Repurchase on Cost of Capital

• Marginal increase in leverage: The share repurchase could cause a slight increase in the debt-to-equity ratio, which might modestly raise the cost of future debt. However, the effect is typically minor compared with the impact of lower interest rates and better maturity profile.
  
• Signal to investors: The share repurchase may signal to the market that management expects stable or declining future cost of capital, reinforcing investor confidence and potentially lowering the equity risk premium as well.

Bottom‑Line on Borrowing Costs

• Immediate effect: Lower coupon/interest from the refinancing lowers current debt service costs.
  
• Future effect: The longer debt schedule and potentially improved credit rating together lower the expected yields on any future borrowing, potentially saving tens of millions of dollars over the life of the debt (e.g., a 30‑basis‑point reduction on a $1.5 billion debt at 5% vs. 5.3% equates to about $45 million in interest savings over a 5‑year period).

3. Overall Assessment & Outlook

Bottom‑Line Statement

The $1.5 billion refinancing, which eliminates any debt maturities until 2028 and coincides with higher EBITDA guidance, should strengthen DiamondRock Hospitality’s credit profile and likely lead to a better credit rating. A higher rating and a longer, more stable debt structure will reduce the company’s borrowing costs both immediately (via lower coupon rates in the refinancing) and in the future (through lower spreads, fewer liquidity premiums, and access to lower‑cost long‑term capital). The share repurchase may marginally raise leverage, but the net effect is a **more favorable credit rating and lower future borrowing costs.**