(The following was released by the rating agency)
HONG KONG, October 09 (Fitch) Fitch Ratings has assigned Hong Kong-based Lifestyle International Holdings Limited's (Lifestyle, 'BBB-'/Stable) proposed 10-year USD notes expected ratings of 'BBB-(EXP)'. The notes, to be issued by LS Finance (2022) Limited, are to be unconditionally and irrevocably guaranteed by Lifestyle. The final ratings are contingent upon the receipt of final documents conforming to information already received.
The ratings reflect Lifestyle's leading position among Hong Kong department stores, supported by strong brand names, "Sogo" and "JiuGuang". They also reflect its strong and stable cash flow and EBITDA generation, particularly from Sogo Causeway Bay. Their current concessionaire model also enables Lifestyle to minimise inventory and bad debt risk and to smooth margin volatility. Operationally, the model allows Lifestyle to adjust its product mix in store to meet customers' changing tastes and preferences.
The ratings also reflect concentration risk and reliance on Sogo Causeway Bay in Hong Kong, which generated over 70% of the group's total sales from 2009 to 2011. Its exposure to the fragmented and competitive Chinese retail market is a constraint and continued expansion into China could also increase execution risks. The ratings are further constrained by Lifestyle's limited scale and geographical diversification.
The Stable Outlook reflects Fitch's expectations that Lifestyle will continue to demonstrate stable operations and cash flow from its main projects in China.
What would trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Accelerated expansion in China
-Significant adverse changes to its business model, such as a move away from the concessionaire model
-Funds from operations (FFO) fixed-charge coverage falling below 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 or collectively, lead to positive rating action include:
-FFO fixed-charge coverage rising above 5x and FFO net leverage declining below 1.5x on a sustained basis. However, Fitch does not expect positive rating action over the next 12-18 months until the group proves itself as a leading player in the regional market and completes its planned expansion in China.
Senior unsecured debt may be downgraded if senior secured debt/EBITDA rises above 2x and
/or unsecured assets/unsecured debt falls below 2x.
Keywords: MARKETS RATINGS LIFESTYLEINTERNATIONAL