CORPORATES CREDIT OPINION NH Hotel Group S.A. 28 April 2020 Update following placement of B1 CFR under review for Update possible downgrade Summary On March 24, 2020, we placed NH Hotel Group S.A.'s (NH Hotel) B1 corporate family rating (CFR) under review for a possible downgrade. RATINGS Lodging has been one of the sectors most significantly affected by the coronavirus outbreak, NH Hotel Group S.A. given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Domicile Spain The rating action was prompted by a sharp decline in room bookings and cancellations, Long Term Rating B1 , Possible Downgrade driven by both fears and travel restrictions since the coronavirus outbreak started in January Type LT Corporate Family Ratings 2020. From a regionally contained outbreak, the virus has rapidly spread to many different Outlook Rating(s) Under Review regions, severely denting air travel and the lodging sector. Our base case assumptions are that the coronavirus pandemic will lead to a severe reduction in the number of hotel guests Please see the ratings section at the end of this report at least over the next three quarters, with potential closures of hotels in the worst affected for more information. The ratings and outlook shown reflect information as of the publication date. locations and very low occupancy or full cancellations for hotels in other countries. We view the outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. NH Hotel has responded to the crisis with the temporary Contacts closing of hotels in all the geographies, firstly in Italy and Spain following government’s mandates and then in Central Europe and Benelux due to the muted level of activity; Anke Rindermann +49.69.70730.788 Associate Managing Director cutting administrative costs and opting for short-time temporary layoff of staff & work [email protected] time reduction; and reducing capital spending to preserve cash. We also expect support measures from governments to help the company reduce its staff cost from the second CLIENT SERVICES quarter onward. Americas 1-212-553-1653 However, NH Hotel's B1 CFR reflects, under more normal operating conditions, (1) an Asia Pacific 852-3551-3077 established European platform focused on midscale, upscale and upper upscale urban Japan 81-3-5408-4100 business hotels; (2) successful portfolio turnaround, resulting in RevPAR (revenue per EMEA 44-20-7772-5454 available room) improvements of 4.9% in 2019 fully driven by higher price ADR (average daily rate) and stable occupancy following a 4.4% increase in 2018 and a 5.1% CAGR since 2009; (3) increase in debt/EBITDA to 4.7x in 2019 because of the impact of IFRS 16 from 3.6x in 2018, (4) strengthened interest coverage to 2.4x for 2019 (1.8x in 2018 and 1.4x in 2017), as well as significant liquidity. These positives are offset by the downside risks caused by the coronavirus outbreak but also the risks associated with NH Hotel's initiatives in Latin America. While limited in scope (9% of net turnover), these efforts carry a measure of risk primarily related to some of the Latin American markets facing difficult macroeconomic environments (Argentina and Mexico), in addition to currency exchange and repatriation issues. MOODY'S INVESTORS SERVICE CORPORATES As Exhibit 1 shows, our analysis assumes a reduction of around 70% in revenue for NH Hotel in the second quarter of 2020, 35% for the full year and some effects into 2021, with a 10% reduction in revenue translating into a significant decline in EBITDA. This scenario leads to a significant increase in debt/EBITDA for the next 12-18 months. The duration and severity of the travel restrictions could include significantly deeper downside risks including zero occupancy and further pressure on revenue and EBITDA. Exhibit 1 NH Hotel's debt/EBITDA and EBITA/Interest coverage development compared with the upper and lower limits for the B1 rating for each metric EBITA/Interest Coverage (lhs) EBITA/Interest Coverage lower limit for B1 rating (lhs) Debt / EBITDA (rhs) Debt/EBITDA upper limit B1 rating (rhs) 2.5x 2.4x 14.0x 2.0x 12.0x 1.8x 10.0x 1.4x 1.5x 8.0x 1.1x 1.0x 1.0x 1.0x 6.0x Debt / EBITDA Debt 0.7x EBITA / InterestCoverageEBITA 4.0x 0.5x 2.0x 0.0x 0.0x 2014 2015 2016 2017 2018 2019 12-18 Month Forward View Source: Company Data and Moody's Financial Metrics™ Credit strengths » Supportive macroeconomic and lodging fundamentals in most markets » Successful completion of a strategic turnaround plan totaling €320 million until 2019, resulting in optimized portfolio quality, stronger KPIs and increased profitability » Successful refinancing deleverage executed between 2016 and 2018 and with voluntary early redemption 2019 bond and the announced conversion of the convertible bond along with voluntary early repurchase (€40 million) of its 2023 bond in 2018, bolstering leverage and coverage » Improved leverage although it was hurt by increase in operating leases because of IFRS 16 » Significant pool of fully owned unencumbered assets of €729 million, which increases financial flexibility » Solid cash position, in combination with an already drawn revolving credit facility and possibility to cut capital spending significantly » Benefits from Minor International's market position in Asia-Pacific and access to its customer base This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 28 April 2020 NH Hotel Group S.A.: Update following placement of B1 CFR under review for possible downgrade MOODY'S INVESTORS SERVICE CORPORATES Credit challenges » Further downside risk because of a potential prolonged slump driven by the coronavirus outbreak, leading to severe reductions in the number of hotel guests at least over the next three quarters, increased closures of hotels and low occupancy » Macroeconomic, currency and repatriation risks associated with Latin American operations, although offset by upside potential » Lack of clarity regarding corporate governance, although ameliorated by recent track record of successful operation and improved transparency to prevent and solve conflicts of interest and related-party transactions » Probably weaker credit quality of the owner, Minor International, than NH Hotel's Rating outlook Given the current market situation, we do not expect any rating upgrade in the short term. A stabilization of the market situation leading to a recovery in metrics to pre-outbreak levels could lead to an upgrade. More specifically, adjusted debt/EBITDA would have to be around 4x, with interest coverage (EBITA/interest) toward 2.5x, while the company maintains a consistent financial policy. Further negative pressure would build if the severe travel restrictions last longer than we expect, resulting in significant cash burn and the risk of a material reduction in the company's cash position or a material rise in debt to fund cash consumption. The review process will focus on (1) the company's continued ability to draw on the credit facilities to further reinforce its liquidity; (2) the current market situation with a review of current occupancy levels and temporary closures of hotels for the next few weeks; (3) cost cutting, capital spending reductions, renegotiation with suppliers and liquidity measures taken by the company and their impact on its cash flow and balance sheet; (4) the stance of NH Hotel's majority owner toward its investment in the company, considering that Minor International Group itself has significant levels of debt and is reliant on cash upstreamed from NH Hotel to service its debt; and (5) the likely impact of the spread of coronavirus in Europe and North America on future hotel bookings and our view regarding the long-term demand profile of the industry. Factors that could lead to an upgrade A rating upgrade is unlikely at this point, given the review for downgrade, but could develop if there is a combination of the following: » NH Hotel's asset-heavy model shows significant resilience to the disruptions caused by the coronavirus outbreak, so that the variable part of the contracts and the company's ability to cut capital spending and other costs will preserve cash » Improvement in credit metrics: debt/EBITDA well below 5.0x, coverage (EBITA/interest) approaching 2.5x and cash flow (retained cash flow/net debt) above 15%, all on a sustained basis and including our standard adjustments » Adequate liquidity and positive free cash flow at all times Factors that could lead to a downgrade The rating could be downgraded if the business disruptions last longer. No material recovery beyond Q2 2020 will result in significant negative cash flow in 2020 and weaker credit metrics, and will put severe pressure on liquidity. Other factors that could lead to a downgrade include: » a deterioration in the credit profile, such that leverage rises to above 5.0x, coverage returns to below 1.5x and cash flow/net debt drops below 10% » any negative liquidity challenges » a material deterioration in the loan-to-value (LTV) coverage of the secured notes, which could strain the instrument rating 3 28 April 2020 NH Hotel Group S.A.: Update following placement of B1 CFR under review for possible downgrade MOODY'S INVESTORS SERVICE CORPORATES Key indicators Exhibit 2 NH Hotel Group S.A 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12-18 Month Forward View Revenue (USD Billion) $1.5 $1.6 $1.7 $1.9 $1.9 $1.2 - $1.7 EBITA Margin 10.9% 9.8% 12.1% 17.3% 15.7% -12.8% - 10.6% Debt / EBITDA 5.6x 5.3x 4.5x 3.6x 4.7x 5.8x - 13.5x EBITA / Interest Expense 1.0x 1.1x 1.4x 1.8x 2.4x 0.2x - 1.5x RCF / Net Debt 11.1% 15.2% 17.0% 20.2% 14.7% 0.4% - 13.5% All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.