Corporates

www.fitchratings.com 11 October 2016

Gaming, Lodging & Leisure / Spain

NH Hotel Group S.A. Update

Key Rating Drivers

Enhanced Liquidity and Performance: Fitch upgraded the ratings of NH Hotel Group S.A. in

September, reflecting the improved liquidity and better structural and cyclical performance in

2016. The new three year (with an option of a two-year extension) EUR250m RCF, together

with the EUR285m 2023 senior secured notes, have reinforced the group's liquidity profile, by

repaying the outstanding syndicated credit, mortgage club loans, and other bilateral facilities

including short term credit facilities and a subordinated loan. This will improve financial

flexibility for an asset-heavy hotel group that remains exposed to performance volatility in a

downturn. The new RCF will also be available to repay the EUR250m convertible bonds in

2018 should they not convert at that time.

Operating Performance Improving: The improving performance should be maintained in

2016 as refurbishments allow increases in average room rates (ADR). 1H16 results showed an

EBITDA margin increase, as revenue per available room (RevPar) on a lfl plus refurbishment

basis rose (1H16 up 5.8% yoy, 2015 up 10.3%). Encouragingly, ADR increases (1H16 prices

up 4.0%, 2015 up 9.9%) were well above those derived from increased occupancy (1H16 up

1.7%, 2015 up 0.3%), confirming the move away from lower-margin tour operator bookings.

Refinancing Improves Capital Structure: The EUR285m 2023 senior secured notes will both

extend and simplify the debt maturity profile of the group. With the refinancing complete, the

group has a simpler capital structure primarily comprising senior secured bonds, a senior

secured RCF facility and a convertible bond issue. The EUR285m 2023 senior secured notes

will also both extend and simplify the debt maturity profile.

Improving Leverage: Leverage is compatible with levels in the 'B' category and we expect

some deleveraging in 2016. We expect Fitch FFO lease-adjusted net leverage to fall to around

7.1x by end-2016 and 6.6x by end-2017, although this remains high compared with peers such

as Accor and Whitbread, which admittedly have slightly different asset ownership mixes. The

high capex of recent years should, however, decline and allow free cash flow (FCF) to turn

positive in 2017. This is despite the group's plan to start paying a dividend from 2017 onwards,

which will limit the scope for deleveraging.

Shareholder Dispute: In June 2016 the board of NH voted off four board representatives from

major shareholder (29.5%) Chinese group HNA, citing possible conflicts of interest due to

HNA’s acquisition of competitor Carlson Hotels Inc. HNA has now sued NH and is asking for

the suspension of these resolutions, but a Spanish Court has recently ruled that the interim

measure requested by HNA has been rejected. We have not factored into our rating any risk of

adverse consequences on NH’s strategy from this dispute but will treat it as an event risk.

Rating Sensitivities

Continued Improving Business Profile: Sustained improvement in trading leading to group

EBITDA margin (excluding capital gains) at or above 12%, together with EBITDAR/gross

interest + rents above 1.8x, FFO lease-adjusted net leverage below 6.5x and a demonstrable

path to sustained positive FCFs would be positive for the ratings.

Liquidity and Debt Structure

Improved Liquidity: With the signing of the EUR250m RCF facility, NH will have significantly

enhanced its liquidity profile, allowing this asset heavy group reasonable operational and

financial flexibility.

Related Research

European Non-food Retail, Lodging, Restaurant Speculative-Grade Handbook (February 2016)

What Investors Want to Know: EMEA Hotels (November 2015)

2016 Outlook: Global Hotels (Still Constructive on Cycle, But Cognizant of Overstaying) (December 2015)

Analysts

Jean-Pierre Husband +44 203 530 1155 jean-pierre.husband@fitchratings.com Maggie Cheng +44 203 530 1689 maggie.cheng@fitchratings.com

Ratings

Long-Term IDR B Secured BB-/RR2

Outlooks Foreign-Currency Long-Term IDR Stable

Financial Data

NH Hotel Group S.A.

31 Dec 15

31 Dec 14

Revenue (EURm) 1,377 1,246 Operating EBITDA (EURm)

125 89

Operating EBITDA margin (%)

9.1 7.2

Total adjusted debt with equity credit

3,163 2,996

Operating EBITDAR/ gross interest expense + rents (x)

1.1 1.1

FFO adjusted net leverage

7.7 7.9

Corporates

NH Hotel Group S.A.

October 2016 2

Immediate Peer Group – Comparative Analysis

Sector Characteristics Operating Risks

The hospitality sector is cyclical and depends on the overall economic environment, tourism,

and business and leisure travel. Variability of operating profit depends on market positioning

(budget, mid-market or upper-end segments) – the more upper-end, the more volatile. Branded

upmarket chains are gaining market share at the expense of independent operators. Hotel

operators are developing specific asset-management strategies (from fully owned operations to

fixed, variable leases, franchise and management contracts) to adjust their business models

and maximise profit.

Financial Risks

Due to significant fixed costs, operating profit is very sensitive to changes in revenue per

available room. Fitch adjusts debt by capitalising operating leases and comparing credit profiles

by looking at debt and interest coverage ratios.

Peer Group Analysis 9FY15 Figures NH Hotel Marriott Whitbread AccorHotel

B/Stable BBB/Positive BBB/Stable BBB-/Stable

Revenue (EURm) 1,377 3,142a 3,681 5,581 EBITDAR 408 2,113 1,205 1,781 EBITDAR margin (%) 29.6 67.3 32.8 32.2 Lease-adjusted net debt/EBITDAR (x) 7.7 n.a. 2.9 3.9 FFO lease-adjusted net leverage (x) 7.7 3.0 3.4 4.0 a Excludes cost reimbursements incurred on behalf of managed and franchised hotels

Source: Fitch, companies

Key Credit Characteristics

When assessing qualitative factors, Fitch looks at RevPar and like-for-like sales, as well as

market positioning, size and geographical diversification. The agency also reviews asset-

management strategies, as well as freehold and leasehold property values. On credit metrics,

Fitch assesses off-balance-sheet obligations and FCF capacity.

Overview of Companies

AccorHotels (BBB−/Stable) – is the European leader in hotels and a major global hotel

company. Main brands include Sofitel, Novotel, Mercure and Ibis. At end-2015, the

consolidated hotel base totalled more than 510,000 rooms (up from 480,000 rooms in 2014), of

which 53% were mid- or upscale and 47% economy or budget hotels. Leverage is relatively

high but stable for the rating. The Fairmont Hotels acquisition improved its geographical and

upscale hotel presence, but is neutral in financial terms as it is largely share-funded. The group

is considering selling part of its HotelInvest business to third parties.

Marriott International, Inc. (BBB/Positive) – Fitch revised the Outlook from Stable to Positive

in November 2015 as it expects the acquisition of Starwood Hotels & Resorts to lower

Marriott’s business risk profile and improve profitability, which should enhance its ability to

navigate cyclical downturns. The combined company will have the largest high-quality,

internationally recognised brand portfolio in the industry (30 brands).

Whitbread PLC (BBB/Stable) – is the UK’s leading hospitality company in the less cyclical

budget segment, with its Premier Inn brand. It benefits from a well-invested estate and

business customers choosing less expensive hotels. About 78% of operating profit is generated

by hotels and restaurants (Beefeater, Table Table and Brewers Fayre), and 22% by Costa

Coffee. The coffee chain is expanding rapidly, with fully owned shops and franchises involving

capital outlay. However, the rating reflects a lack of geographical diversification.

Peer Group Issuer Country

BBB Marriott International, Inc.

United States

Whitbread PLC United Kingdom BBB- AccorHotels France B NH Hotel Group S.A.

Spain

Issuer Rating History

Date LT IDR (FC)

Outlook/ Watch

30 Sep 16 B Stable 20 Apr 16 B- Positive 26 Feb 16 B- Stable 29 Apr 15 B- Stable 28 Nov 14 B- Stable 19 Dec 13 B- Stable 28 Oct 13 B- Stable

Snapshot Profile: Major Issuer-Specific Rating Factors and Trends

Rating factor Statusa Trend

Operations Average Improving Market position Weak Improving Finances Weak Improving Governance Average Neutral Geography Average Improving a Relative to peer group

Source: Fitch

Related Criteria

Criteria for Rating Non-Financial Corporates (September 2016)

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (April 2016)

Country-Specific Treatment of Recovery Ratings (April 2016)

Corporates

NH Hotel Group S.A.

October 2016 3

Debt Maturities and Liquidity (Pro-forma After Refinancing in September 2016)

Debt maturities (EURm)

2016 12 2017 32 2018 259 2019 254 After 2019 3337 Cash and equivalents 51

Undrawn committed facilities 310 Facility A EUR250m due September 19 with an option for a 2-year extension

250

Bilateral credit facilities 60

Source: Fitch

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2012 2013 2014 2015 2016F 2017F

Leverageincluding Fitch expectations

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2012 2013 2014 2015 2016F 2017F

Interest Coverincluding Fitch expectations

-6%-4%-2%0%2%4%6%8%

10%12%

2012 2013 2014 2015 2016F 2017F

Revenue Growthincluding Fitch expectations

-5%

0%

5%

10%

15%

20%

2012 2013 2014 2015 2016F 2017F

FFO Profitabilityincluding Fitch expectations

Fixed lease44%

Mgt. contracts

24%

Owned22%

Variable lease10%

NH Hotel Portfolio by Ownership Structure(No. of rooms in 2015)

0

50

100

150

200

2012 2013 2014 2015

NH Hotel Group SACapex (EURm) from 2012 to 2015 included

Source: Company

13%

39%33%

15%

24%

47%

19%

10%

Spain Germany/Benelux/C.Europe Italy Latam

FY15 Segmental SpliOuter ring: RevenueInner ring: EBITDA

NH Hotel Group S.A.———— Gaming, Lodging & Leisure Median ———— Developed B Cat Median ———— Source: Company data; Fitch

0% 25% 50% 75% 100%

5 Oct 15

5 Oct 16

Distribution of Sector Outlooks

Directional Outlooks and Rating

Watches

Negative Stable Positive

Fitch’s expectations are based on the

agency’s internally produced,

conservative rating case forecasts.

They do not represent the forecasts of

rated issuers individually or in

aggregate. Key Fitch forecast

assumptions include:

• 2016 and 2017 RevPar increases

more moderate than in 2015;

• cost increases to be partly offset by

rising salaries in Spain and Italy;

• operating lease costs from 2016 to

2018 of betweenEUR299m and

EUR334m p.a.;

• dividends restarted at a modest level

from 2017.

Definitions

• Leverage: Gross debt plus lease

adjustment minus equity credit for

hybrid instruments plus preferred

stock divided by FFO plus gross

interest paid minus interest received

plus preferred dividends plus rental

expense.

• Interest cover: FFO plus gross

interest paid minus interest received

plus preferred dividends divided by

gross interest paid plus preferred

dividends.

• FFO profitability: FFO divided by

revenue.

• For further discussion of the

interpretation of the tables and

graphs in this report see Fitch’s

“Interpreting the New EMEA and Asia-

Pacific Corporates Credit Update Format”

Special Report, dated 25 November

2009 and available at

www.fitchratings.com.

Corporates

NH Hotel Group S.A.

October 2016 4

Corporates

NH Hotel Group S.A.

October 2016 5

Key Debt Instruments

Summary

Issuer, amount, maturity ISIN Rating Ranking Summary of terms

EUR285m senior secured notes 2023

XS1497527736 BB-/RR2 Senior 7 years bullet, fixed-rate coupon, first lien secured, rank pari- passu with all other senior secured debt, no maintenance covenants

EUR250m senior secured notes 2019

XS50954676283 BB-/RR2 Senior 6 years bullet, fixed-rate coupon, first lien secured, rank pari- passu with all other senior secured debt, no maintenance covenants

EUR250m unsecured convertible notes 2018

XS0989390249 n.r. Subordinated n.a.

The information above is intended as summary information only. It is not intended to and cannot be a substitute for detailed analysis of the bond documents and consultation with legal counsel Source: Fitch

Corporates

NH Hotel Group S.A.

October 2016 6

* EBITDA/R after Dividends to Associates and Minorities

b This has been adjusted by deducting 25% variable leases from the group rent total

c For our FFO adjusted net leverage (including variable lease adjustment), we have used a total adjusted debt with equity

credit 3,092,150 (EUR 000) How to interpret the forecast presented The forecast presented is based on the agency’s internally produced, conservative rating case forecast. It does not represent the forecast of the rated issuer. The forecast set out above is only one component used by Fitch to assign a rating or determine a rating outlook, and the information in the forecast reflects material but not exhaustive elements of Fitch’s rating assumptions for the issuer’s financial performance. As such, it cannot be used to establish a rating, and it should not be relied on for that purpose. Fitch’s forecasts are constructed using a proprietary internal forecasting tool, which employs Fitch’s own assumptions on operating and financial performance that may not reflect the assumptions that you would make. Fitch’s own definitions of financial terms such as EBITDA, debt or free cash flow may differ from your own such definitions. Fitch may be granted access, from time to time, to confidential information on certain elements of the issuer’s forward planning. Certain elements of such information may be omitted from this forecast, even where they are included in Fitch’s own internal deliberations, where Fitch, at its sole discretion, considers the data may be potentially sensitive in a commercial, legal or regulatory context. The forecast (as with the entirety of this report) is produced strictly subject to the disclaimers set out at the end of this report. Fitch may update the forecast in future reports but assumes no responsibility to do so.

Corporates

NH Hotel Group S.A.

October 2016 7

Source: Fitch

Corporates

NH Hotel Group S.A.

October 2016 8

Corporates Ratings NavigatorLodging

aaa AAA Stable

aa+ AA+ Stable

aa AA Stable

aa- AA- Stable

a+ A+ Stable

a A Stable

a- A- Stable

bbb+ BBB+ Stable

bbb BBB Stable

bbb- BBB- Stable

bb+ BB+ Stable

bb BB Stable

bb- BB- Stable

b+ B+ Stable

b B Stable

b- B- Stable

ccc CCC Stable

cc CC Stable

c C Stable

d or rd D or RD Stable

Issuer Default

Rating

Factor

Levels

Sector Risk

Profile

Operating

EnvironmentFinancial

Flexibility

Financial

StructureProfitability

Property

CharacteristicsBrandingDiversification

Market

Position/Scale

Management

and Corporate

Governance

Business Profile Financial Profile

NH Hotel Group S.A.

Corporates

NH Hotel Group S.A.

October 2016 9

Corporates

NH Hotel Group S.A.

October 2016 10

Reconciliation of Key Financial Metrics for NH Hotel Group S.A.

(EUR Thousand) 31 Dec 2015

Income Statement Summary

Operating EBITDA 125,015

+ Recurring Dividends Paid to Non-controlling Interest 0

+ Recurring Dividends Received from Associates 0

+ Additional Analyst Adjustment for Recurring I/S Minorities and Associates 0

= Operating EBITDA After Associates and Minorities (k) 125,015

+ Operating Lease Expense Treated as Capitalised (h) 282,597

= Operating EBITDAR after Associates and Minorities (j) 407,612

Debt & Cash Summary

Total Debt with Equity Credit (l) 902,333

+ Lease-Equivalent Debt (Operating Lease Expense Treated as Capitalised * Capitalised Lease Multiple) (h*i) 2,260,776

+ Other Off-Balance-Sheet Debt 0

= Total Adjusted Debt with Equity Credit (a) 3,163,109

Readily Available Cash [Fitch-Defined] 42,699

+ Readily Available Marketable Securities [Fitch-Defined] 0

= Readily Available Cash & Equivalents (o) 42,699

Total Adjusted Net Debt (b) 3,120,410

Cash-Flow Summary

Preferred Dividends (Paid) ( f) 0

Interest Received 4,806

+ Interest (Paid) (d) -56,750

= Net Finance Charge (e) -51,944

Funds From Operations [FFO] ( c) 69,406

+ Change in Working Capital [Fitch-Defined] -8,386

= Cash Flow from Operations [CFO] (n) 61,020

Capital Expenditures (m) -176,083

Multiple applied to Capitalised Leases (i) 8.0

Gross Leverage

Total Adjusted Debt / Op. EBITDAR* [x] (a/j) 7.8

FFO Adjusted Gross Leverage [x] 7.8

Total Adjusted Debt/(FFO - Net Finance Charge + Capitalised leases - Pref. Div Paid) (a/(c-e+g-f))

Total Debt With Equity Credit / Op. EBITDA* [x] (l/k) 7.2

Net Leverage

Total Adjusted Net Debt / Op. EBITDAR* [x] (b/j) 7.7

FFO Adjusted Net Leverage [x] 7.7

Total Adjusted Net Debt/(FFO - Net Finance Charge + Capitalised leases - Pref. Div Paid) (b/(c-e+g-f))

Total Net Debt / (CFO - Capex) [x] ((l-o)/(n+m)) -7.5

Coverage

Op. EBITDAR / (Interest Paid + Lease Expense)* [x] (j/-d+h) 1.2

Op. EBITDA / Interest Paid* [x] (k/(-d)) 2.2

FFO Fixed Charge Cover [x] 1.2

(FFO - Net Finance Charge + Capit. leases - Pref. Div Paid) / (Gross Interest Paid + Capit. leases - Pref. Div Paid) ((c-e+g-f)/(-d+g-f))

FFO Gross Interest Coverage [x] 2.1

(FFO - Net Finance Charge - Pref. Div Paid) / (Gross Interest Paid - Pref. Div Paid) ((c-e-f)/(-d-f))

*EBITDA/R after Dividends to Associates and M inorities

Source: Fitch based on company reports

Corporates

NH Hotel Group S.A.

October 2016 11

Fitch Financial Adjustments – Summary Financials

NH Hotel Group S.A.

Reported

Values

Sum of Fitch

Adjustments

Cash

Adjustment

Lease

Adjustment

Adjusted

Values

31 Dec 15

Income Statement Summary

Revenue 1,376,634 0 1,376,634

Operating EBITDAR 125,015 282,597 282,597 407,612

Operating EBITDAR after Associates and Minorities 125,015 282,597 282,597 407,612

Operating EBITDA 125,015 0 125,015

Operating EBITDA after Associates and Minorities 125,015 0 125,015

Operating EBIT 18,856 0 18,856

Debt & Cash Summary

Total Debt With Equity Credit 902,333 0 902,333

Total Adjusted Debt With Equity Creditb 902,333 2,260,776 2,260,776 3,163,109

Lease-Equivalent Debt 0 2,260,776 2,260,776 2,260,776

Other Off-Balance-Sheet Debt 0 0 0

Readily Available Cash & Equivalents 77,699 -35,000 -35,000 42,699

Not Readily Available Cash & Equivalents 0 35,000 35,000 35,000

Cash-Flow Summary

Cash Interest (Paid) LTM -56,750 0 -56,750

Funds From Operations [FFO] 69,406 0 69,406

Change in Working Capital [Fitch-Defined] -8,386 0 -8,386

Cash Flow from Operations [CFO] 61,020 0 61,020

Non-Operating/Non-Recurring Cash Flow 0 0 0

Capital (Expenditures) -176,083 0 -176,083

Common Dividends (Paid) 0 0 0

Free Cash Flow [FCF] -115,063 0 -115,063

Gross Leverage

Total Adjusted Debt / Op. EBITDAR* [x] 7.2 7.8

FFO Adjusted Leverage [x] 7.4 7.8

Total Debt With Equity Credit / Op. EBITDA* [x] 7.2 7.2

Net Leverage

Total Adjusted Net Debt / Op. EBITDAR* [x] 6.6 7.7

FFO Adjusted Net Leverage [x] 6.8 7.7

Total Net Debt / (CFO - Capex) [x] -7.2 -7.5

Coverage

Op. EBITDAR / (Interest Paid + Lease Expense)* [x] 2.2 1.2

Op. EBITDA / Interest Paid* [x] 2.2 2.2

FFO Fixed Charge Coverage [x] 2.1 1.2

FFO Interest Coverage [x] 2.1 2.1

*EBITDA/R after Dividends to Associates and M inorities

bFFO Adjusted net leverge (including variable lease adjustment) calculation, we have used a lease adjustment figure o f 2,232,516 (EUR 000)

Corporates

NH Hotel Group S.A.

October 2016 12

Issuer NH Hotel Group SA IDR B

Currency EUR

Going Concern Enterprise Value Liquidation Value

Book

Value

Advance

Rate

Available to

Creditors

Going Concern Enterprise Value 991.2 Cash 77.7 0% 0.0

EBITDA Multiple (x) 7 A/R 169.3 75% 127.0

Inventory 9.5 50% 4.8

Net PPE 1724.2 50% 862.1

Total 993.8

Enterprise Value for Claims Distribution

Greater of Going Concern Enterprise or Liquidation Value 993.8

Additional value from affiliates

Less Administrative Claims 10% 99.4

Adjusted Enterprise Value for Claims 894.4

Distribution of Value

Secured Priority Amount

Value

Recovered Recovery Recovery Notching Rating

Super Senior Facility 0.0 - - - - -

Senior Secured 823.0 823.0 100% RR1* +3 BB

Senior Secured Notes due 2019 250.0 250.0 100% RR1* +3 BB

Senior Secured Notes due 2023 285.0 285.0 100% RR1* +3 BB

Mortgage 38.0

RCF facility 250.0

Restructuring Facility

Acquisition Facility

Acquisition Facility

Capital Leases

Second Lien

Concession Payment Availability Table

Adjusted Enterprise Value for Claims 894.4

Less Secured Debt Recovery 823.0

Remaining Recovery for Unsecured Claims 71.4

Concession Allocation 0% 0.0

Value to be Distributed to Senior Unsecured Claims 71.4

* Capped at RR2 for Spanish jurisdiction

The amount of concession payments is highly dependent on circumstances, but Fitch typically

allows up to 5% of the recovery value available to senior unsecured creditors to be allocated to

concession payments. Concession payments allocated to subordinated debt should never result

in higher recoveries than those o f senior unsecured debt.

Recovery Analysis

Corporates

NH Hotel Group S.A.

October 2016 13

Considerations b+ b b– ccc Trend Fitch's View

Business Model Robust Sustainable Intact Compromised �

NH has been able to transform several

prestigious NH Collection Hotels in

Madrid and Italy and to improve the

company's segmentation and image.

Strategy /

Execution RiskLimited

Moderate execution

risk

Meaningful execution

riskHigh execution risk �

NH has been able to execute sale and

leaseback ON hotel properties, but major

refurbishment and asset rotation carry

some material risks

Cash Flow Consistently Positive Neutral to positive FCF Volatile FCFConstantly negative

FCF �

Negative FCF has been driven by high

capex in segmenting and upgrading

hotels in recent years. As the

refurbishment programme completes,

FCF should begin to turn positive.

Leverage profileClear Deleveraging

PathDeleveraging capacity High but sustainable Unsustainable �

Leverage remains high but should reduce

as operational performance improves and

capex spend reduces in the next three

years.

Governance and

financial policyCommitted

Some commitment to

deleveragingAggressive

Uncommitted / biased

towards equity

interests�

Financial policy has been consistent and

pro-active in improving creit profile

through re-negotiating fixed leases to

variable leases, creating variable leases

and management contracts for new hotel

pipeline.

Refinancing risk Limited Manageable High Excessive �The refinancing risk is now low with the

new 2023 secured notes and RCF to be

signed imminently.

Liquidity Comfortable Satisfactory Limited Poor/partly funded �

The new EUR250m three year RCF facility

will provide acceptable liquidity for the

group. In addition the group has over

EUR575m of unencumbered assets

which could offer some financial flexibility

under certain conditions.

CONCLUSION b

Corporates

NH Hotel Group S.A.

October 2016 14

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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