Marriott Corp. was started in 1927 as a root beer stand by the late J. Willard Marriott, a businessman who loathed debt. Yet an abysmal real estate market has pushed the company's debt load to a historic high of $3.6 billion.
So high has Marriott's mountain of obligations risen that yesterday one of the country's leading bond rating agencies, Moody's Investors Service Inc., downgraded the corporation's debt to Baa3 from Baa2.
"Moody's rating action is based on the expectation that Marriott's leverage will remain high and debt-protection measurements modest over the next few years," the rating service said in a statement.
But analysts who track Marriott don't fault J. W. Marriott Jr., the company's chairman and chief executive officer, for its current debt problem. Rather, they say that a sharp downturn in the commercial real estate market is to blame.
Although the debt of the diversified hotel and contract services company is still of investment grade, Moody's action will likely cause Marriott to pay more when it borrows in the future. That's in spite of the fact that Standard & Poor's Corp. and Duff & Phelps, two other major debt-rating agencies, have kept Marriott's debt rating at BBB, or medium grade.
One big reason Marriott has become so heavily leveraged is that the company has been unable to sell $1.5 billion in hotel properties because of the poor real estate market and the fact that would-be buyers would have difficulty finding financing to VTC make such purchases, said Terry Souers, a Marriott vice president.
Moody's said that Marriott's difficulty in selling its hotels was a major factor in the downgrading of the debt. "Moody's believes that the current downturn in lodging industry trends . . . combined with a dearth of real estate financing will continue to hinder asset disposal over the next two years," the rater said.
Steven Rockwell, an analyst at Alex. Brown & Sons, said that Bethesda-based Marriott has outperformed the overall hotel industry yet still faces "flattish occupancy levels" because of the recession and its effect on business travel.
While hotel occupancy rates for the industry overall are hovering around the 60 percent figure, Marriott had occupancy rates around 70 percent, he noted.
He said that Marriott has enough cash flow to cover the debt service on individual properties and added that "there is minimal risk of serious financial problems."