Fitch changes Softbank-backed Oyo's long-term rating from 'B-' to 'B'

Ratings agency Fitch has revised its outlook on hospitality major Oyo, upgrading its long-term foreign and local currency issuer default ratings (IDRs) to ‘B’ from ‘B-’, with a ‘stable’ outlook.

Fitch has also upgraded the rating on the $660 million senior secured term loan facility (outstanding $448 million) due 2026 issued by Oyo's fully owned subsidiary, Oravel Stays Singapore, to 'B' from 'B-'.

The agency said that the upgrade reflects its estimate that Oyo's Ebitda leverage will improve to below 5X on sustained Ebitda growth amid cost savings, a demand recovery in the short-term stay market and Oyo's buyback of $195 million in debt in November 2023.

“Oyo's liquidity is adequate due to a sufficient cash balance and our expectation of positive free cash flow from the financial year ending March 2025 (FY25). However, refinancing risks remain with $448 million in debt maturing in June 2026,” Fitch said.

The firm added that the rating also reflects Oyo's asset-light business model, minimal capex needs, largely exclusive distribution rights, fixed revenue share and strong long-term growth potential, mitigated by the sector's high competitive intensity and demand cyclicality.

Oyo's provisional Ebitda rose to around $105 million in FY24, driven by staff and marketing cost savings as revenue was flat year on year. Fitch expects it will increase to $135 million in FY25.

“We expect Oyo's Ebitda leverage to improve to 4.2X in FY24 and 3.3X in FY25, well below our previous positive rating guideline of 5.0X, driven by improving profitability and the partial debt buyback during FY24,” Fitch said.

Moreover, consumer demand in the travel and tourism industry is expected to continue to improve in Oyo's key end-markets in FY25.

Oyo had around $100 million in cash at end-March 2024, a committed undrawn facility of $25 million, and Fitch expects the company to generate about $50 million in free cash flow in FY25.

“We believe Oyo's improving profitability and declining leverage should support its ability to refinance the debt in a timely manner. However, high interest rates and tight capital market conditions could present challenges,” Fitch said.

This comes days after the company withdrew its draft papers for an initial public offering (IPO) for the second time in three years.

The firm is reportedly close to finalising a refinancing plan and is looking to raise $350 million to $450 million through bond issuance.

Meanwhile, the company is also looking to tap private investors for equity funding at a $3 billion to $4 billion valuation to cut debt, media reports said.