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Rating Action:

Moody's affirms Bright Food's Baa3 ratings; stable outlook

 The document has been translated in other languages

01 Sep 2015

Hong Kong, September 01, 2015 -- Moody's Investors Service has affirmed Bright Food (Group) Co., Ltd. (Bright Food)'s Baa3 issuer rating, as well as the Baa3 senior unsecured rating on the USD notes issued by Bright Food Hong Kong Limited and guaranteed by Bright Food.

The outlook for the ratings is stable.

RATINGS RATIONALE

Moody's lowered Bright Food's baseline credit assessment (BCA) to ba3 from ba2 and, at the same time, increased the uplift to three notches from two notches, based on our expectation of a high level of support from the Shanghai municipal government (unrated) in the event of financial distress.

"The increase in uplift reflects Bright Food's increased importance to the Shanghai municipal government after it consolidated Shanghai Liangyou Group (Liangyou, unrated)," says Lina Choi, a Moody's Vice President and Senior Analyst, and the International Lead Analyst for Bright Food.

Liangyou manages the official grain reserves for the Shanghai municipal government. After the consolidation, Bright Food will undertake more policy functions to secure food supply in Shanghai.

In addition, the Shanghai municipal government has positioned Bright Food as a key platform to consolidate the city's state-owned assets relating to food and agriculture.

"The lowering of Bright Food's BCA to ba3 is mainly due to its weakened financial profile. Its adjusted gross debt increased by around RMB12 billion in 2014, with its adjusted debt/EBITDA rising to around 8.4x at end-2014 from 7.2x at end-2013", adds Choi.

The high leverage was largely the result of multiple debt-funded acquisitions and the weak performance of its sugar business. Slow sales at its property units also resulted in a material rise in inventory, which in turn contributed to around RMB5 billion of additional debt.

Moody's expects that Bright Food's leverage will remain high at end-2015 due to its sizeable capex plans. Its adjusted debt/EBITDA will likely stay at 7x-8x, a level more appropriate for a BCA of ba3.

Nevertheless, Moody's says there are some positive drivers for Bright Food's credit profile.

"Bright Food should benefit from (1) the planned equity placement of its three listed subsidiaries, Shanghai Haibo Co., Ltd. (Haibo, unrated), Shanghai Maling Aquarius Co., Ltd. (unrated) and Shanghai Bright Diary & Food Co. Ltd (Bright Diary, unrated); (2) the consolidation of Tnuva Food Industries Israel Agricultural Cooperative Society Ltd. (Tnuva, unrated) and Liangyou, which will increase its business diversification and bring in some synergies; and (3) the potential improvement of its sugar and property businesses' performance, amid the recovery in domestic sugar prices and the property business' public listing," says Kai Hu, a Moody's Senior Vice President, also the Local Market Analyst for Bright Food.

Although Moody's expects these positive drivers will help improve Bright Food's credit metrics over time, they have yet to materialize and, until then, remain subject to, among others, the risk of the equity placements being postponed and to execution risks related to its overseas acquisitions.

Further debt-funded acquisitions or larger-than-expected capex would also offset the positive impact from the above drivers.

Bright Food's had consolidated cash-on-hand of RMB21 billion and financial assets (mainly minority stakes in listed companies) of RMB28.6 billion at end-2014, which can largely cover its projected capex of around RMB8.5 billion (excluding the consideration of EUR1 billion paid for the Tnuva acquisition) and maturing debt of RMB35.8 billion in 2015.

The stable outlook reflects Moody's expectation that (1) Bright Food will maintain its strong market position in its core food and agriculture businesses; (2) its high business diversification will result in relatively stable revenue and profits; (3) Bright Food will continue to receive a high level of support from the Shanghai municipal government.

Bright Food's rating will be upgraded if it (1) achieves debt deleveraging in line with Moody's expectations; (2) demonstrates a more disciplined approach to acquisitions with less reliance on debt funding; and (3) is successful in integrating its new acquisitions.

Credit metrics that could trigger a rating upgrade include: (1) adjusted debt/EBITDA below 6.0x-6.5x; and (2) EBITDA/interest above 2.5x-3.0x on a sustained basis.

A severe deterioration in its business or financial profile could result in further negative rating actions. Such could be the result of (1) large debt-funded acquisitions or capital spending that further weaken its balance sheet; (2) a decline in the group's strong market position in its key business areas, significantly weakening its long-term profitability and cash flow generation.

A material weakening of Shanghai government support, though not likely, could also trigger negative rating actions, as evidenced by (1) a material decline in the government's ownership or control, and/or (2) the company ceasing to carry out major policy functions for the Shanghai government.

Credit metrics that could trigger a rating downgrade include: (1) adjusted debt/EBITDA above 8.5x-9.0x; and (2) EBITDA/interest below 1.5x-2.0x for a prolonged period.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Incorporated in China and headquartered in Shanghai, Bright Food (Group) Co., Ltd. is effectively 100% owned by the State-owned Assets Supervision and Administration Commission of the Shanghai municipal government. It is one of the largest food conglomerates in China with four major business segments -- food and agriculture; food wholesale and retail; real estate development; and logistics.

The Local Market analyst for this rating is Kai Hu, +86 (21) 2057-4012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Lina Choi
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms Bright Food's Baa3 ratings; stable outlook
No Related Data.
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