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Fitch Downgrades Parkson to 'CCC' as Bond Maturity Looms
November 8, 2017 / 10:19 AM / a month 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: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com 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#solicitation 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. 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