Marriott International, the well-known hotelier, saw operating losses in its third quarter of 2009, as a result of its venture to move into financing time-shares during a slowing real estate market. In addition, the sluggish economy has not helped its primary business segment that caters to cash-based lodging for business and leisure travelers. As a result, Marriottâ€™s credit profile shows a somber â€˜BBB-â€˜ debt rating assigned to its long-term debt, which some describe as on the border between investment and junk bond status. In fact, some analysts are worried that Marriott may violate its key loan covenant: its leverage ratio.
- What is a junk bond?
- Why is this borderline rating a bad thing for Marriott?
- Explain what a loan covenant ratio is. Assuming that Marriottâ€™s covenant is tied to either the debt to equity ratio or the cash debt coverage ratio, describe how aggressively managing costs and accelerating debt reduction would help Marriott avoid a violation of its covenant.
SOURCE: Phillips, D. â€œTimeshare Business Unwelcome Guest at Marriott International,â€ BNET â€“ Companies in the Buzz (Retrievable online at http://industry.bnet.com/travel/10003824/timeshare-business-unwelcome-guest-at-marriott-international/)