(Scott C. Petersen, chairman and CEO, LodgeNet, top right photo)
"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," explained Standard & Poor's credit analyst Jeanne Mathewson.
(David M. Bankers, senior vice president, product and technology development; and chief technology officer, LodgeNet, top left photo)
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. As of Sept. 30, 2008, LodgeNet had outstanding debt of $610.5 million.
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.
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.
(James G. Naro, senior vice president, legal and human Resources; and general counsel, LodgeNet, middle right photo)
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. 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 is a provider of in-room electronic entertainment and data services to hotels and, to a lesser extent, hospitals and other guest-based businesses.
The company has a leading position in its market niche, good EBITDA margins in the mid-20% area, and relatively stable long-term noncancellable hotel property contracts.
(Steven R. Pofahl, senior vice president and general manager, Hospitality Operations, Lodge Net, bottom left photo)
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 sales 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.
Mimi Barker, New York (1) 212.438.5054, firstname.lastname@example.org
Jeanne Mathewson, CFA, Chicago (1) 312.233.7026
Tulip Lim, New York (1) 212.438.4061