Moody's assigns first-time 'B3' ratings to OYO, outlook stable

Moody's Investors Service has assigned a first-time B3 corporate family rating (CFR) to Oravel Stays Private Limited, popularly known as the hospitality chain Oyo. 

Moody’s CFRs are opinions of a corporate family’s ability to honor all of its financial obligations. 

The bond credit rating firm also assigned a B3 rating to the senior secured term loan to be issued by Oravel Stays Singapore Pte. Ltd, Oyo's wholly owned subsidiary. The proposed loan will be guaranteed by Oyo and many of its units, it said in a note on Thursday. 

Bloomberg reported Thursday that India’s Oyo is looking to raise $600 million in debt to bolster its finances, citing sources. This comes after the second wave of Covid-19 in India affected travel demand and hurt the company’s recovery effort, Bloomberg added. The loan issuer will be Oyo’s Singapore entity.

"Oyo's B3 corporate family rating reflects its position as one of the largest providers of budget accommodation in its key operating markets, good long-term growth prospects for the domestic budget travel sector, adequate liquidity to cover its likely cash burn and continued financial support from its key shareholders," says Sweta Patodia, a Moody's Analyst.

The rating incorporates Moody's expectation that Oyo will continue to incur losses over the next 2-3 years and that its path to profitability remains uncertain in light of travel restrictions due to the pandemic.  

The rating also incorporates Oyo's aggressive financial policy, as demonstrated by the use of debt to fund its evolving business, Moody's said. Even though Oyo, funded by Softabnk, among others, has a history of pursuing aggressive expansion and business policies that have led to significant losses, its shareholders have provided substantial equity capital to cover its cash burn, Moody's added.

Oyo is well-positioned to benefit from increased demand for domestic travel given international tourism is likely to remain subdued over at least the next 2-3 years. Oyo also stands to benefit from increasing access to internet in India over the past few years and faster adoption of digital services since the start of the pandemic, Moody's said. 

Moody's expects OYO's operating performance to start recovering in the second half of 2021 once infections subside.

It also said Oyo has a strong market position, presence across hotels and holiday homes, high proportion of direct demand, reputable brand, exclusive access to all rooms of its hotel partners and an established technology platform.

"Oyo's rating is constrained by its short operating track record and history of operating losses. Losses, however, have reduced significantly relative to that in the fiscal year ended 31 March 2020, as a result of a change in its business strategy and cost reduction measures," the note said. 

According to Moody's, if the number of daily infections fail to decline to more manageable levels, the risk of nationwide lockdowns cannot be ruled out, which will delay the company's recovery. 

"The proposed loan will provide OYO with a liquidity buffer to sustain its cash burn over the next 2-3 years," added Patodia.

Moody's also assigned a stable outlook to Oyo, which considers its expectation that Oyo's operations can be funded, pro forma for the loan proceeds, for at least the next three years and the cash burn will significantly reduce over the next 12-18 months as operating performance starts to recover following the roll-out of large-scale vaccination programmes.