American credit market outlook

Credit investors are applauding Hilton Hotels Corp's plans to cash in on the rebounding luxury hotel market with 50 new Conrad Hilton hotels catering to the wealthy. Hilton's credit spreads have narrowed by about 5 basis points since Hilton announced the expansion on Wednesday, and spreads could narrow more over time, analysts said. A strong lodging recovery, Hilton's rock-solid balance sheet and the tantalising profit potential in the luxury market, where new hotels have been scarce, make this a good time for such growth, analysts and industry experts said.
"If you look at Hilton's brand offerings, the one place they do not have a strong presence right now is the high end," said Chris Brown, analyst at Banc of America Securities. "Expanding the Conrad kind of makes sense."
Conrad Hotels is a joint venture of Hilton Hotels and Hilton International, a unit of London-based Hilton Group Plc.
The hotel industry was hit by a three-year downturn in travel after the Sept 11, 2001 attacks, but Hilton worked hard to protect its credit ratings during the slump, Brown said.
Hilton cut debt by about $2 billion over the last five years, he said, putting it in a good position to invest without hurting its credit.
Hilton's financial exposure also will be limited because it plans to manage the hotels and not own them, analysts noted.
Hilton's 7.625 percent notes due 2012 have narrowed by about 5 basis points since the expansion was announced to 78 basis points more than Treasuries, according to MarketAxess.
In the credit derivatives market, the cost of insuring Hilton's debt for five years has fallen by about 4 basis points on the bid side to about 46 basis points, or $46,000 for every $10 million of principal protected. Those spreads have fallen by half over the last five months.
The luxury hotel market looks attractive on several levels, industry experts said.
Soaring land and construction costs in major cities have blocked luxury hotel construction for several years, limiting competition, said Mark Woodworth, executive vice president at Atlanta-based PKF Consulting, which provides research and consulting on the lodging sector.
On the demand side, corporate travel is in a solid recovery, allowing hotels to raise rates, said Patricia Wright, an analyst at Fitch Ratings. Low interest rates are another plus, she said.
"The capital markets have become much more amenable to hotel financing," she said.