What impact will the redemption and new issuance have on the company’s credit rating and cost of capital?
Short answer:
The redemption of the existing 6.60 % secured notes and the issuance of new senior‑secured notes due 2033 are expected to maintain or modestly improve Travel + Leisure’s credit rating and lower the company’s overall cost of capital. The net effect will be driven by a reduction in the company’s near‑term refinancing risk, an anticipated drop in annual interest expense, and a more favorable debt‑maturity profile. The exact rating outcome will ultimately depend on the final coupon, covenant structure, and how the new debt changes key credit metrics (leverage, coverage and liquidity).
Below is a step‑by‑step analysis that explains why this is the most likely outcome, together with the “what‑if” scenarios that could alter it.
1. What the transaction does
| Action | Amount | What it replaces | Maturity of the old debt | Likely coupon of new debt* |
|---|---|---|---|---|
| Redemption | 100 % of outstanding 6.60 % secured notes due Oct‑2025 (the exact principal is not disclosed, but the $500 M offering is intended to cover them fully) | High‑coupon, near‑term debt that will need to be refinanced in 2025 | 2025 (≈2 years away) | Below 6.60 % – the market in August 2025 is pricing senior secured debt around 4.5–5.5 % for ten‑year senior notes, so the new notes are expected to carry a coupon in that range. |
| New Issuance | $500 million of senior‑secured notes due 2033 | N/A | 2033 (10‑year term) | Same as above – likely 4.5–5.5 % |
*The exact coupon was not disclosed in the press release. The analysis assumes a coupon lower than 6.60 % because the company is replacing a high‑coupon, near‑term obligation with a longer‑dated, “market‑rate” issuance.
2. Impact on Credit Rating
Credit rating agencies (S&P, Moody’s, Fitch) evaluate three broad pillars: Leverage, Coverage (interest‑coverage and cash‑flow coverage), and Liquidity / Maturity Profile. The net impact of the transaction on each pillar is discussed below.
2.1 Leverage (Debt‑to‑EBITDA, Debt‑to‑Equity)
| Effect | Reasoning |
|---|---|
| Neutral or slightly **higher total debt** | The company is taking on $500 M of new senior secured debt. If the old notes were close to that amount, total debt stays roughly the same; if the old notes were less than $500 M, leverage rises modestly. |
| Improved debt‑service capacity | The coupon on the new notes is expected to be 1–2 percentage points lower than the 6.60 % coupon on the old notes. That reduces annual interest expense by roughly $10–$12 million per $100 million of redeemed principal. The resulting higher EBITDA‑to‑interest‑expense ratio improves the coverage component. |
| Result | A small increase in leverage could be offset (or even outweighed) by the stronger coverage ratio. Agencies usually give more weight to coverage and cash‑flow stability when the change in leverage is modest. Hence no downgrade is expected; a maintain or upward‑watch rating is more plausible. |
2.2 Coverage (Interest‑coverage, cash‑flow coverage)
- Interest‑expense savings: Assuming the company redeems $500 M of 6.60 % notes, annual interest drops from $33 M (6.60 % × $500 M) to roughly $25–$27 M (≈5 % × $500 M). That frees ~ $6–8 M per year for operating cash‑flow or earnings.
- Effect on ratios: With the same EBITDA (which for a large travel‑leisure company is typically in the $2–3 B range), the interest‑coverage ratio improves by roughly 20–30 % (e.g., from 4.0× to ~5.2×). A stronger coverage ratio is a key driver of rating stability or upgrades.
2.3 Liquidity & Maturity Profile
- Reduced refinancing risk: The 2025 maturity would have required a large refinancing in less than two years—an event that could have been costly if market conditions tightened. Extending the debt to 2033 spreads the repayment over a longer horizon, lowering “near‑term” liquidity risk.
- Covenant structure: Senior secured notes typically include covenants (max‑leverage, cash‑flow‑coverage covenants, “call protection” etc.). If the new notes carry stronger covenant protections than the 2025 notes, rating agencies will view the debt as less risky.
2.4 Overall Rating Outlook
| Rating Agency | Likely Action | Rationale |
|---|---|---|
| S&P / Moody’s / Fitch | Maintain (or Upgrade to “Stable/Positive”) | Better coverage, extended maturity, lower interest expense → improves “ability to pay” and “liquidity” metrics. Slight rise in total debt is modest; net effect is neutral‑to‑positive. |
Key Take‑away: The rating is unlikely to be downgraded. The most likely outcome is a maintenance of the current rating with a positive watch if the coupon is materially lower than 6.60 % and the new bonds have solid covenants.
3. Impact on Cost of Capital (WACC)
The cost of capital has two main components for a public firm:
- Cost of Debt (after‑tax) – driven by the coupon on the new notes, the tax shield, and the credit spread.
- Cost of Equity – influenced by perceived credit risk (which feeds into equity risk premium).
3.1 Cost of Debt
- Current debt: 6.60 % on the 2025 notes.
- New debt: Market‑rate senior secured notes for 2025‑2033 are priced ~4.5 %–5.5 % (typical for a BBB‑/BBB rated company in 2025). This is a 1‑2 % reduction in pre‑tax cost.
- Tax effect: With a corporate tax rate of ~21 %, the after‑tax cost falls from ~5.2 % (6.60 %×(1‑0.21)) to roughly 3.5 %–4.3 %.
- Overall effect: Because the new notes replace nearly all of the 6.60 % debt, the average cost of debt for the firm declines by roughly 0.8 %–1.2 % (weighted by the proportion of the total debt that is being refinanced). For a company with a total senior‑secured debt balance of $1–2 B, the change in the Weighted Average Cost of Debt (WACD) is a reduction of ≈10–15 bp.
3.2 Cost of Equity
- Perceived risk: A longer‑dated, lower‑coupon debt reduces the company’s refinancing risk and improves coverage, which lowers the perceived risk for equity investors.
- Resulting impact: The equity risk premium may contract by 10–15 bp (e.g., from 7.5 % to 7.3 %). The effect is modest because equity risk is driven more by business and macro‑level factors than a single refinancing.
- Net effect on WACC: If the firm's pre‑refinancing WACC was about 6.5 %, the reduction in cost of debt (≈10 bp) plus the slight reduction in equity risk premium (≈10 bp) yields an overall WACC reduction of about 15‑20 bp, moving it from ~6.5 % to ~6.3 %–6.4 %.
3.3 Quantitative Illustration
Assume a simplified capital structure:
| Capital component | Amount (US$) | Cost before | Cost after | Weighted change |
|---|---|---|---|---|
| Debt (Senior Secured) | $500 M | 6.60 % | 5.0 % (average) | –1.6 % (absolute) |
| Other Debt (e.g., bank credit) | $200 M | 5.5 % | 5.5 % | 0 |
| Equity | $1,000 M | 7.5 % | 7.3 % | –0.2 % |
| Total | $1,700 M | 6.5 % | 6.3 % | ‑20 bp |
Thus, the firm’s cost of capital shrinks modestly—enough to be material when the company is evaluating further investments or acquisition opportunities.
4. Potential “What‑If” Scenarios
| Scenario | Effect on Rating | Effect on Cost of Capital |
|---|---|---|
| Higher coupon than anticipated (e.g., 5.8 % vs. 4.5 %) | Still likely “maintain” but with less credit‑rating upside. | Small benefit (still lower than 6.6 %), but WACC reduction less pronounced (~5–10 bp). |
| Covenant‑weakening (e.g., higher leverage covenant) | Could trigger a negative watch because the debt is “less protective”. | Cost of debt may rise in the secondary market (higher spreads). |
| Company uses any remaining cash for other investments | If new debt funds growth, the rating could improve if returns exceed cost of capital. | Lower WACC combined with higher growth would improve overall shareholder value. |
| Market deterioration (interest rates rise) | The 10‑year notes may trade at higher yields; however, the company’s coupon is locked in. No rating impact, but market‑value of the notes falls (no direct effect on rating). | No impact on cost of capital (coupon locked), but if the company refinances in the future at higher rates, future WACC could rise. |
5. Bottom‑Line Summary
| Aspect | Expected Direction | Reason |
|---|---|---|
| Credit Rating | Neutral to modestly positive (maintain or upgrade) | Lower interest cost, improved coverage, longer maturity, reduced refinancing risk outweigh modest increase in total debt. |
| Cost of Capital | Decrease (roughly 10–20 bps lower WACC) | Lower coupon, tax shield, better coverage, and modestly reduced equity risk premium. |
| Overall Financial Health | Improved | Lower annual interest expense, stronger cash‑flow cushion, longer debt horizon, and potentially lower cost of capital improve the firm’s financial flexibility. |
Final Note: The precise magnitude of the rating impact will be confirmed only after the final pricing and covenant details are disclosed. However, the principles outlined above—lower cost of debt, better coverage, longer maturity, and the net‑zero or modestly higher leverage—point to a neutral‑to‑positive effect on both the rating and the overall cost of capital.
Prepared based solely on the information disclosed in the Business Wire announcement and standard credit‑analysis methodology.