American credit market outlook

Credit spreads of Starwood Hotels and Resorts World-wide Inc have tightened since the company was upgraded in late August to investment grade, however its tight spreads fully account for its risks, according to some analysts.
With spreads at current levels little upside remains, according to some analysts. "Trading at historically tight spreads and with a credit profile likely to weaken somewhat going forward, we believe Starwood bonds are fully valued," BofA analysts Christopher Brown and Justin Starnes said in a report.
The cost to insure Starwood's debt with credit default swaps have fallen by around 15 basis points since the upgrade to about 67.5 basis points, or $67,500 per year for five years to insure $10 million in debt.
Moody's Investors Service raised its ratings on Starwood to investment grade on August 28, citing its debt reduction with the proceeds of asset sales. S&P raised Starwood to investment grade on July 26. Fitch Ratings still ranks the company "BB-plus," one level below investment grade.
"Management plans to use free cash flow plus existing balance sheet debt capacity to return value to shareholders through growth investments, dividends, and share repurchases," the analysts wrote.
Starwood has said that its target leverage, or gross debt to earnings before interest, taxes, depreciation, amortisation and rent (EBITDAR), is 3.5 times compared with around 2.4 times today.
One risk to the company that may lead spreads wider is that the possibility the hotel operator increases its leverage by making acquisitions, said Michael Dimler, analyst at UBS Securities in Stamford, Connecticut.
"They have the room to do it and they have never shied away from taking on leverage where it has strategically made sense," Dimler said. "The hotel environment, in terms of M&A, also appears to be fairly active."
The addition of Starwood's debt to investment grade indexes may provide some support to the company's spreads, however longer term its spreads are either likely to remain around where they are, or go wider, Dimler said.
Starwood's spreads are tighter than peers including Hilton Hotels Corp, which trades around 82.5 basis points, and Harrah's Entertainment Inc, which is about 86.5 basis points.