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Rating Action:

Moody's affirms Li & Fung's ratings but revises outlook to negative

24 Mar 2020

NOTE: On March 25, 2020, the press release was corrected as follows: The eleventh paragraph of the RATINGS RATIONALE section was changed to “In terms of liquidity, its $932 million in cash holdings and $556 million in available committed credit facilities as of the end of 2019 are more than enough to cover its $379 million of debt due in 2020.” Revised release follows.

Hong Kong, March 24, 2020 -- Moody's Investors Service has revised the outlook on Li & Fung Limited to negative from stable.

At the same time, Moody's has affirmed Li & Fung's Baa3 issuer rating, senior unsecured bond ratings, provisional (P)Baa3 senior unsecured MTN rating, provisional (P)Ba2 preferred stock MTN rating, and subordinated Ba2 perpetual capital securities rating.

RATINGS RATIONALE

"The negative outlook reflects our expectation that Li & Fung's weak earnings amid the coronavirus outbreak will strain its financial metrics, at least through 2020," says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.

"This development, combined with the structural challenges faced by its key customers, could lead to a negative free cash flow and an erosion in Li & Fung's capital structure," adds Tsuen.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Despite Li & Fung's unique position in global sourcing, it is exposed to the retail sector in the US and Europe, which will be significantly affected by the shock given their sensitivity to consumer demand and sentiment.

Li & Fung's supply chain solutions and onshore wholesale businesses, which accounted for 59% of its core operating profit in 2019, are exposed to US and European retail sector. The remaining 41% of its core operating profit came from the logistics business, which is exposed more to the Asian economies.

Li & Fung's credit profile will be weakened in the near term due to declining consumer spending and the structural challenges that its retail and apparel customers have already been facing. It is vulnerable to shifts in market sentiment in these unprecedented operating conditions, and it remains vulnerable to the outbreak continuing to spread.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Li & Fung of the breadth and severity of the shock, and the deterioration in credit quality it has triggered, which will take time to recover.

While Moody's expects the company's operating performance and financial metrics to recover once virus-related disruptions ease, the timing and pace of recovery is highly uncertain.

Even before the outbreak, Li & Fung's turnover and core operating profits fell 10% and 23% respectively in 2019, mainly due to continued structural industry difficulties including customer store closures, bankruptcies and inventory destocking.

Such adverse operating conditions also expose the company to risks from disruptions in supply chains, as well as from write-downs on receivables due to customer bankruptcies.

These risks are partly offset by the company's improved capital structure, solid liquidity, and cautious financial management. It reduced its reported net debt to $244 million at the end of 2019 from $413 million in 2018, following the sale of a minority stake in the company's logistics business last year.

In terms of liquidity, its $932 million in cash holdings and $556 million in available committed credit facilities as of the end of 2019 are more than enough to cover its $379 million of debt due in 2020.

Also, Li & Fung has implemented various restructuring measures to turn around its operations and improve its customer engagement, which will support the company's revenue growth over the next 1-2 years.

The privatization of Li & Fung, which was proposed on March 20 by the Fung family in partnership with GLP Pte. Ltd. (Baa3 review for downgrade), would not have an immediate impact on Li & Fung's credit quality, despite GLP's high financial leverage. This is because there would be no increase in the debt or leverage of Li & Fung, and the Fung family will have 60% of the voting shares and thus retain majority control of the business post transaction. Moody's also expects Li & Fung to maintain its existing report, disclosure and governance standards.

Li & Fung's Baa3 issuer rating continues to reflect its strong and unique market position in the global sourcing and trading of consumer products, as well as its long operating track record. It also reflects the company's high level of customer and supplier diversification.

The ratings also reflect Li & Fung's social risk from changes in consumer preference towards online shopping. This situation has resulted in structural weakness for traditional retailers and the company.

In terms of governance risk, the ratings consider Li & Fung's shareholding concentration in the Fung family and large dividend payouts over the last few years. These factors are mitigated by management's long track record of managing the company through cycles, and the company's lowered dividends since 2019.

An upgrade of the ratings is unlikely, given the negative outlook. The outlook could return to stable if (1) the company stabilizes its earnings; (2) its adjusted net debt/EBITDA declines below 2.75x; and (3) it maintains its conservative financial management.

Moody's could downgrade the ratings if (1) the company fails to curb the decline in revenue and/or earnings; (2) its adjusted net debt to EBITDA remains above 2.75x for a prolonged period; or (3) it pursues aggressive acquisitions or shareholder return policies, resulting in a sizeable negative free cash flow.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Founded in 1906, Li & Fung Limited is a global consumer product sourcing and trading company. Based in Hong Kong, it has over 230 offices and distribution centers in more than 40 economies.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

Gloria Tsuen, CFA
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
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