November 8, 2017 / 10:18 AM / a year ago

Fitch Downgrades Parkson to 'CCC' as Bond Maturity Looms

(The following statement was released by the rating agency) HONG KONG, November 08 (Fitch) Fitch Ratings has downgraded China-based department store operator Parkson Retail Group Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'CCC' from 'B-' to reflect rising uncertainty over the company's plans to refinance or repay its USD500 million bonds maturing in May 2018. KEY RATING DRIVERS Bond Maturity Approaching: The downgrade reflects the poor outlook on the company's liquidity for 2018, with its USD500 million 4.5% bonds maturing in May 2018 and substantially weaker cash flow generation compared with several years ago. Parkson appears to have options to address the issue - in particular, it can potentially use its retail properties in Beijing and Qingdao as collateral for secured lending. The company has also indicated that it is in discussions with banks to explore various funding arrangements. Nonetheless, with less than six months remaining, it is critical that Parkson lines up refinancing options soon. High Leverage: Parkson's leverage remains high in the context of marginal EBITDA generation, despite dropping slightly at end-2016 after the company raised CNY1.9 billion in net proceeds from the sale of a store in Beijing. Fitch expects FFO payables-adjusted net leverage to range between 6x-7x in the coming two to three years and FFO fixed-charge coverage at around 1x, assuming no significant interest and rental cost increases. Onshore Cash Needed for Operations: The company's CNY4.6 billion in cash as of end-June 2017 is insufficient to meet the CNY3.8 billion in debt that matures within one year. This is because Fitch classifies the cash amount as not-readily-available since the company needs around CNY1.7 billion-2.0 billion in cash (customer deposits plus 85% of accounts payables) for day-to-day operations due to its concessionaire business model and large negative working capital. In addition, most of Parkson's debt is issued by its offshore holding company, while most of its cash, time deposits and principal-guaranteed deposits are held by onshore operating subsidiaries. Repatriating onshore cash to repay offshore debt may require government approval. Parkson also had CNY0.4 billion in non-principal-guaranteed structured deposits as of end-June 2017, which is not counted as cash, in accordance with Fitch's rating criteria. Profitability Remains Weak: Fitch does not expect a rapid turnaround in revenue or profits in the next two years, although the company's operations showed some signs of stabilisation in 1H17. Parkson's fundamentals have deteriorated due to weaker consumer spending and competition from other retail formats, such as e-commerce and shopping malls. Its heavy reliance on rented properties exacerbated the impact of the sales decline on margins, with its EBITDA margin falling to 2% of gross sales proceeds in 2016, compared with a margin in the low teens for most Fitch-rated department store operators. DERIVATION SUMMARY Parkson's 'CCC' rating reflects its refinancing risk, as its bond maturity is less than six months away. The company's business profile has been hurt by weaker consumer spending and competition from other retail formats, while its profitability has been negatively affected by a high proportion of rented properties. Parkson's financial profile is also weaker than that of peers, such as Golden Eagle Retail Group Limited (BB-/Negative), with lower coverage and higher leverage ratios. No Country Ceiling, parent/subsidiary or operating environment aspects impact the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Flat gross sales proceeds and low-single-digit revenue growth from higher direct sales - EBITDA margin of 24%-26% of revenue and 2%-3% of gross sales proceeds - Maintenance capex of CNY150 million per year - No common dividends beyond the actual amount paid in 1H17 RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action -Successfully refinancing of the May 2018 bond with long-term funding and stabilisation of core business Developments that May, Individually or Collectively, Lead to Negative Rating Action -Failure to address refinancing requirements by 1Q18 LIQUIDITY Refinancing Needed: Parkson's USD500 million bond will mature on 3 May 2018. It is critical that the company arranges for refinancing in the coming few months. Parkson has high cash balance but Fitch classifies a portion of it as not-readily-available for debt repayment to take into account the negative working capital cycle. Parkson has little other debt aside from the May 2018 bonds. Contact: Primary Analyst Cathy Chao Associate Director +852 2263 9967 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Yee Man Chin Director +852 2263 9696 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments: Payables adjusted net leverage; Fitch subtracts customer prepayments and 85% of trade payables from cash and cash equivalents. This metric mainly applies to Chinese department stores operating under the concessionaire model. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below