Scott C. Petersen
Scott C. Peterson is LodgeNet's chairman and CEO.Concerned the new competition could hurt LodgeNet's near-future revenue; S&P lowered its corporate credit rating on the Sioux Falls, S.D.-based firm to 'B-' from 'B'. The rating outlook is stable.
The issue-level rating on the company's secured debt also was lowered to 'B-' from 'B'. LodgeNet was formerly LodgeNet Entertainment Corp.
"The downgrade is based on our concern that the company could violate its leverage covenant once covenants tighten in the first quarter of 2009, particularly given the steep decline in the operating performance and challenging economy," explains Standard & Poor's credit analyst Jeanne Mathewson.
The 'B-' rating reflects LodgeNet's "slim cushion of compliance with its bank covenants, declining operating trends, exposure to the cyclical and seasonal lodging industry (which is facing challenges due to the economic downturn), and the limited size and long-term growth potential of this market niche," says Methewson.
LodgeNet's operating results "are subject to consumer and corporate travel, to the discretionary nature of traveler purchases, and to the unpredictable quality of movies, which generate the majority of room revenue."
The analyst says, "Longer term, we are concerned that increasing broadband access in hotel rooms, combined with growing usage of portable devices, could reduce demand for LodgeNet's core services, such as movies on demand."
However, she adds, "The company's participation in high-speed Internet access services, aided by its February 2007 acquisition of assets of StayOnline Inc., helps mitigate that risk somewhat."
LodgeNet provides in-room electronic entertainment and data services to hotels and, to a lesser extent, hospitals and other guest-based businesses. The analyst says the company has a leading position in its market niche, good EBITDA margins in the mid-20% area, and relatively stable long-term non-cancellable hotel property contracts.
The reported leverage as per the covenant calculation was 4.38x as of Sept. 30, 2008, versus the leverage ratio covenant of 4.50x, which further tightens to 4.25x on March 31, 2009.
"LodgeNet will need to significantly reduce debt in order to maintain compliance, based on our expectation that EBITDA will continue to decline well into 2009," the S&P analyst estimates. As of Sept. 30, 2008, LodgeNet had outstanding debt of $610.5 million.
The company's revenue and EBITDA decreased 5% and 3%, respectively, in the third quarter of 2008 year over year. Growth in hotel services and system ales partially offset the decline in Guest Entertainment revenue.
"We expect the decline in Guest Entertainment revenue to continue as a result of lower hotel occupancy rates and continued consumer and business guest caution," Mathewson says.
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