Golden Eagle Retail Group Ltd. Upgraded To #BB# From #BB-# On Improving Outlook Stable

Stocks and Financial Services Press Releases Thursday April 12, 2018 18:17
HONG KONG--12 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 12, 2018--S&P Global Ratings raised its long-term issuer credit rating on Golden Eagle Retail Group Ltd. to 'BB' from 'BB-'. The outlook is stable. At the same time, we raised our long-term issue rating on the company's senior unsecured notes to 'BB-' from 'B+'.

We raised the ratings because we expect Golden Eagle's liquidity to improve over the next 12 months following the company's refinancing of its syndicated loan due in April 2018. We also expect Golden Eagle to maintain stable operating performance over the period despite tough retail conditions in China.

Golden Eagle has minimal short-term debt and a better extended maturity profile after the refinancing. The company raised Chinese renminbi (RMB) 4.1 billion equivalent of three-year bank loans to refinance the syndicated loan of RMB4.8 billion due on April 16, 2018, with the remaining paid with cash. Meanwhile, the company had cash of RMB5.6 billion (after excluding trade payables of RMB1.3 billion that were cleared in early 2018) at the end of 2017.

In addition, we expect Golden Eagle to maintain sufficient headroom under its new bank loan covenants to withstand a decline in earnings or an increase in debt by at least 15%. We have therefore revised our liquidity assessment to adequate from less than adequate.

We anticipate that Golden Eagle's debt-to-EBITDA ratio will increase to 2.8x-3.3x in the next 12-24 months, from about 2.5x in 2017. We expect the company's capital expenditure to remain high at RMB1.0 billion-RMB1.2 billion annually over the next 12-24 months to support store upgrades and new store development (it plans to open four stores in 2019) to maintain competitiveness in the highly fragmented sector. We also anticipate some volatility in working capital stemming from its property development business.

We expect Golden Eagle's strategy of transforming its department stores to lifestyle centers while upgrading its merchandise mix and services (particularly from new stores) to support its revenue growth. The company's increase in same-store sales and margins was more than its peers', reflecting its ability to manage changes in the retail landscape and evolving consumer preferences, in our view. Lifestyle centers represented 74.2% of Golden Eagle's gross floor area at the end of 2017.

Golden Eagle's control over costs through centralized marketing and streamlined operations should help it to maintain its profitability. We anticipate that Golden Eagle's EBITDA margin will remain stable at 38.0%-42.0% in the next 12 months, compared with around 41.8% in 2017. This is despite the company's operations in China's highly fragmented and competitive retail industry.

The stable outlook on Golden Eagle reflects our expectation that the company will mainly use internal funds for growth and abstain from substantial debt-funded expansion over the next 12-24 months. We anticipate that the company will maintain a debt-to-EBITDA ratio of 2.8x-3.3x over the period.

We also believe that Golden Eagle will continue to withstand changing dynamics in China's retail industry and difficult operating conditions.
We may downgrade Golden Eagle if the company's debt-to-EBITDA ratio rises above 4.0x without signs of improvement.

This could happen if: (1) the company's growth or margins decline due to a weakening of its competitive position or tougher operating conditions than we expect; or (2) the company undertakes substantial debt-funded expansion, acquisitions, and aggressive dividend payments.

We may upgrade Golden Eagle if the company can maintain a longer track record of the debt-to-EBITDA ratio below 3.0x.

This can happen if: (1) the company can continue to grow and improve profitability through execution of its transformation strategy while maintaining prudent cost controls; and (2) operating conditions in the retail industry in China stabilize with a recovery in consumer sentiment; and (3) the company limits debt-funded expansion, property acquisitions, or dividend payments over the next 12 months.

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