Rating Action: Moody's downgrades Lifestyle's ratings, outlook stable
Global Credit Research - 11 Aug 2020
Hong Kong, August 11, 2020 -- Moody's Investors Service has downgraded Lifestyle International Holdings Limited's corporate family rating (CFR) to Ba2 from Ba1, and the senior unsecured debt ratings on the notes guaranteed by Lifestyle and issued by LS Finance (2022) Limited and LS Finance (2025) Limited to Ba3 from Ba2.
The rating outlooks were changed to stable from negative.
"The downgrade reflects our expectation that Lifestyle's net leverage will stay elevated over an extended period, due to increased investment in financial assets and significantly reduced earnings and cash flow amid the coronavirus pandemic and economic downturn," says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.
"Furthermore, the rating action reflects increased business risk for its retail business, given the high uncertainty over the recovery in retail consumption and tourist arrivals, and its heavy reliance on tourists from mainland China." adds Tsuen.
RATINGS RATIONALE
Lifestyle's Ba2 CFR reflects (1) the company's strong competitive position in Hong Kong SAR, underpinned by its flagship SOGO department store in Causeway Bay; (2) its flexible cost structure; and (3) low inventory risk stemming from its concessionaire business model.
The rating also reflects the company's high revenue concentration, moderate scale, and the development and business risks associated with the Kai Tak project.
Lifestyle's adjusted net debt/EBITDA, including 50% of listed short-term financial assets (except disclosed high-yield bonds), rose to around 7.6x on an annualized basis in H1 2020 from 3.5x in 2019 as a result of increased net debt and significantly reduced earnings.
Lifestyle's adjusted net debt, including 50% of listed short-term financial assets (except disclosed high-yield bonds), rose to HKD11 billion at the end of June 2020 from HKD9 billion at the end of 2019.
This increase was a result of significantly reduced earnings and cash flow amid the pandemic-induced disruptions, along with increased investments in less-liquid securities such as high-yield bonds, unlisted funds and securities, and individual company shares.
Lifestyle's revenue and reported EBITDA declined 55% and 49% respectively in H1 2020 due to significantly reduced local consumption and a sharp drop in tourist flows into Hong Kong SAR.
Moody's expects adjusted net debt/EBITDA to gradually improve in line with recovery in earnings, but to remain elevated at around 4.5x-6.0x during 2021-22. This level will no longer support the company's previous Ba1 rating.
Moody's expects earnings over the next 1-2 years will remain significantly lower than the levels in 2019, with a prolonged recovery only starting from 2021.
Moody's also expects net debt to remain high over the next 1-2 years, because of its weakened cash flow and large capital spending on its Kai Tak project -- the development of a land lot for office and retail use, including the opening of a new SOGO department store -- which is targeted for completion before 2023.
Lifestyle's liquidity is adequate. At the end of June 2020, its HKD6.1 billion in cash and equivalents was more than sufficient to cover its HKD3.8 billion in short-term debt and capital spending over the next 12 months.
In terms of environmental, social and governance (ESG) factors, Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Lifestyle of the breadth and severity of the shock, and the deterioration in credit quality it has triggered. In addition, the rating considers Lifestyle's increased risk tolerance in financial investments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that the company's net debt levels will stay broadly stable over the next two years, which will allow its key financial metrics to rebound to levels that are in line with the Ba2 rating category once earnings recover.
The rating could be upgraded if Lifestyle (1) increases its scale while maintaining solid profitability, (2) increases its financial flexibility by reducing its secured debt, and (3) improves its debt leverage.
Credit metrics indicative of a potential upgrade include adjusted net debt/EBITDA declining below 3.5x, and adjusted retained cash flow/net debt -- including 50% of listed short-term financial assets -- rising above 15%, on a sustained basis.
Moody's would downgrade the ratings if the company's (1) operating performance fails to recover, (2) liquidity weakens, or (3) financial profile deteriorates further, including due to delays and/or cost overruns in the Kai Tak project.
Credit metrics indicative of a downgrade include adjusted net debt/EBITDA failing to improve towards 4.5x, or adjusted retained cash flow/net debt -- including 50% of listed short-term financial assets -- remaining below 8%, on a sustained basis.
The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Listed on the Hong Kong Stock Exchange in 2004, Lifestyle International Holdings Limited is a Hong Kong-based retail operator that focuses on mid- to upper-end department stores. The company operates two SOGO stores in Hong Kong.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Gloria Tsuen, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Chris Park Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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