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April 29 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based department store operator Parkson Retail Group Limited’s (Parkson) USD500m notes due 2018 a final rating of ‘BBB-'. The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 22 April 2013.
The notes are rated at the same level as Parkson’s senior unsecured rating of ‘BBB-’ as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.
Key Rating Drivers
Weak 2012 performance: A weak macro environment and the company’s mature store network, which leaves it more exposed to competition, have affected the company’s 2012 performance. Parkson’s business was further hurt by the remodelling of and subway construction work near key stores. As a result, the company’s same store sales growth was nearly flat at 0.4% in 2012 and is also estimated to be flat in Q113. But Fitch expects Parkson’s performance to improve from Q2, leading to modest mid-single digit same store sales growth for 2013.
Little rating headroom: With almost flat same store sales growth, start-up costs for new stores and higher rental expenses which include one off increases, Parkson’s EBITDA fell nearly 20% to CNY1.4bn in 2012. As a result, funds from operations (FFO) fixed charge coverage deteriorated to 2.2x in 2012, and is expected to remain below Fitch’s negative guideline of 2.5x for 2013. Fitch expects credit metrics to show improvement from 2014 with YoY sales picking up from Q213 but sees little headroom at the current rating level.
Well diversified nationwide network: Parkson’s ratings are supported by its well established and geographically diversified presence in China across 35 cities.
Its top 10 stores accounted for approximately 50% of total gross sales proceeds, compared with nearly 80% for key listed industry peers. In Fitch’s view, the relatively low concentration risk offsets the lower growth that Parkson’s older stores generate compared with its industry peers. The company’s revenue is also less reliant on gift voucher sales compared with industry peers.
Strong financial position: Parkson’s ratings are also supported by the company’s prudent financial policy, evidenced by its healthy balance sheet and cash position. As at December 2012, the company had cash and cash equivalents of CNY5.1bn, well exceeding its trade payables and customer deposits of CNY3.2bn.
The company plans to refinance all its bank loans with the proceeds from the USD500m notes, which will then be the only debt on the company’s balance sheet.
Capex high but flexible: The company is still in an expansionary mode but has scaled back its expansion plans from H213 onwards. Additional opportunistic acquisitions are likely to put pressure on the company’s cash flow but as evidenced in 2012, it has the flexibility to adjust its capex by delaying store openings and Fitch believes it will likely do so depending on the market environment. The risk is further mitigated by the company’s strong cash position.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- FFO fixed charge coverage falling below 2.5x on a sustained basis
- Sustained negative free cash flow
- Same store sales growth of less than 5%
- Failure to refinance debt maturing in 2013
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- FFO fixed charge coverage rising above 4.0x on a sustained basis
- Sustained positive free cash flow