Fitch Downgrades Golden Eagle to 'BB-'; Outlook Negative

Golden Eagle Retail

07/04/2016 03:31

(The following statement was released by the rating agency)

HONG KONG, April 06 (Fitch) Fitch Ratings has downgraded China-based department 
store operator Golden Eagle Retail Group Limited's (Golden Eagle) Long-Term 
Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB+'. 
Fitch has assigned a Negative Outlook to the IDR. The ratings have been removed 
from Ratings Watch Negative.

The downgrade reflects a deterioration in Golden Eagle's financial profile and 
weakness in its core business. The Negative Outlook reflects Fitch's expectation 
that leverage may continue rising unless there is a meaningful turnaround in 
business.

KEY RATING DRIVERS 

Challenging Retail Market: The operating environment for Golden Eagle has been 
difficult in the past two to three years due to changing consumer behaviour and 
a lack of differentiation among department stores. Golden Eagle's same-store 
sales started declining in 2014 and fell 5.3% in 2015. The company has taken 
steps to stem the slide, such as adding more lifestyle elements to its stores, 
and has performed better than some peers. That said, the success of these 
efforts depends on consumer sentiment, which continues to weaken.

Shifting Business Model: Golden Eagle is looking to offset the weakness in 
concessionaire sales by growing other revenue sources, such as direct sales, 
rental income and auto services. These new measures also aim to attract foot 
traffic and differentiate Golden Eagle from competition. Golden Eagle has also 
entered the residential property development business after acquiring Global Era 
Group (Global Era) in late 2015. 

Leverage Up Sharply: Golden Eagle's payables adjusted net leverage jumped to 
5.7x by the end of 2015 from 3.3x at the end of 2014, driven by weaker cash 
generation, ongoing capex, share buybacks and acquisitions. The Global Era 
acquisition, announced in late 2015, includes a large residential property 
project in Wuhu, located in China's Anhui province. Golden Eagle plans to 
restart sales of the Wuhu Riverside project in 1H16, with proceeds helping to 
reduce leverage over the next few years. However, timing and price remain 
uncertain. Fitch expects payables adjusted net leverage to remain elevated at 
over 5.0x for the next two years. 

Property Value Supports Rating: Golden Eagle owns more than 60% of the floor 
space it operates. The carrying value of unencumbered fixed asset, land and 
investment property is CNY9.7bn at the end of 2015. Fitch estimates the market 
value of some of these assets to be substantially higher, such as the flagship 
store in Nanjing, capital of Jiangsu province. Fitch believes these assets may 
be used as collateral to secure additional debt funding if needed, partially 
mitigating the liquidity risk from a loan covenant breach. 

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Flat gross sales proceeds, with mild decline in concessionaire sales offset by 
growth in direct sales, rental and service income

- Low to mid-single digit revenue growth

- EBITDA margin of 37%-38% (2015: 38.1%) 

- Capex of CNY1.2bn-1.5bn per year

- 30% dividend pay out

RATING SENSITIVITIES

Positive: The Outlook will be revised to Stable if the Negative triggers are not 
breached in the next 12 months.

Negative: Future developments that may, individually or collectively, lead to 
negative rating action include:

- Payables adjusted net leverage (adjusted for lease, payables and customer 
deposits) sustained above 6.0x (2015: 5.7x)

- Further decline in operating revenues and gross sales proceeds

- Sustained negative free cash flow

- Failure to generate planned cash flows from property sale

LIQUIDITY

Breach of Loan Covenants:  Golden Eagle breached certain financial covenants of 
its syndicated loan with CNY4.9bn carrying value and has reclassified this 
amount as a current liability. The company is now renegotiating the terms of the 
loan with its lenders. Fitch believes the lenders are not likely to demand 
immediate repayment. The company does not have other near term liquidity issues. 
It had CNY4.2bn of cash and short-term investments and CNY0.4bn of current bank 
loans, excluding the CNY4.9bn syndicated loans, as at 31 December 2015. 

Contact: 

Primary Analyst

Yee Man Chin

Director

+852 2263 9696

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Yi Zhang

Analyst

+86 21 5097 3390

Committee Chairperson

Kalai Pillay

Senior Director

+65 6796 7221

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

- Leases: Fitch has adjusted the debt by adding 7x annual fixed operating lease 
expense (2015: fixed rental expense of CNY32.5m)

- Payables Adjusted Net Leverage: Fitch subtracts customer prepayments and 85% 
of trade payables from cash and cash equivalents. This metric mainly applies to 
Chinese department stores operating under the concessionaire model.

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Methodology - Including Short-Term Ratings and Parent and 
Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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