(The following was released by the rating agency)
HONG KONG, October 09 (Fitch) Fitch Ratings has assignedHong Kong-based Lifestyle International Holdings Limited's(Lifestyle, 'BBB-'/Stable) proposed 10-year USD notes expectedratings of 'BBB-(EXP)'. The notes, to be issued by LS Finance(2022) Limited, are to be unconditionally and irrevocablyguaranteed by Lifestyle. The final ratings are contingent uponthe receipt of final documents conforming to information alreadyreceived.
The ratings reflect Lifestyle's leading position among HongKong department stores, supported by strong brand names, "Sogo"and "JiuGuang". They also reflect its strong and stable cashflow and EBITDA generation, particularly from Sogo Causeway Bay.Their current concessionaire model also enables Lifestyle tominimise inventory and bad debt risk and to smooth marginvolatility. Operationally, the model allows Lifestyle to adjustits product mix in store to meet customers' changing tastes andpreferences.
The ratings also reflect concentration risk and reliance onSogo Causeway Bay in Hong Kong, which generated over 70% of thegroup's total sales from 2009 to 2011. Its exposure to thefragmented and competitive Chinese retail market is a constraintand continued expansion into China could also increase executionrisks. The ratings are further constrained by Lifestyle'slimited scale and geographical diversification.
The Stable Outlook reflects Fitch's expectations thatLifestyle will continue to demonstrate stable operations andcash flow from its main projects in China.
What would trigger a rating action?
Negative: Future developments that may, individually orcollectively, lead to negative rating action include:
-Accelerated expansion in China
-Significant adverse changes to its business model, such asa move away from the concessionaire model
-Funds from operations (FFO) fixed-charge coverage fallingbelow 3x (FY11: 7.2x) and FFO net leverage rising above 2.5x(FY11: 0.8x) on a sustained basis.
Positive: Future developments that may, individually orcollectively, lead to positive rating action include:
-FFO fixed-charge coverage rising above 5x and FFO netleverage declining below 1.5x on a sustained basis. However,Fitch does not expect positive rating action over the next 12-18months until the group proves itself as a leading player in theregional market and completes its planned expansion in China.
Senior unsecured debt may be downgraded if senior secureddebt/EBITDA rises above 2x and
/or unsecured assets/unsecured debt falls below 2x.
Keywords: MARKETS RATINGS LIFESTYLEINTERNATIONAL