Fitch Revises Outlook on Golden Eagle to Negative; Affirms at 'BB'

Golden Eagle Retail

17/04/2020 06:32

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong/Shanghai-April 17: 

Fitch Ratings has revised the Outlook on China-based department store operator 
Golden Eagle Retail Group Limited's (Golden Eagle) Long-Term Issuer Default 
Rating (IDR) to Negative, from Stable, and has affirmed the Long-Term IDR at 
'BB'. Fitch has also affirmed Golden Eagle's senior unsecured rating at 'BB'.

The Outlook revision reflects the high impact of the coronavirus outbreak on the 
retail sector, and uncertainty over the timing of recovery. Golden Eagle's core 
business has been interrupted, with a meaningful decline in sales in 1Q20. Fitch 
anticipates revenue to decline by a quarter in 2020 before returning gradually 
to 2019's level by 2022.

Key Rating Drivers

Challenging Retail Environment: Retail sales in China slumped by 20.5% 
year-on-year from January to February 2020. The coronavirus outbreak has been 
largely contained in China, though foot traffic in shopping malls is still 
affected to some extent by social distancing measures. In addition, slowing 
economic growth may weaken consumer demand, particularly in the discretionary 
segment where Golden Eagle is focusing. 

Coronavirus Pressures Financial Profile: Fitch expects leverage and 
profitability metrics to exceed our downgrade trigger temporarily. Fitch 
estimates payables-adjusted FFO net leverage to reach 5.1x in 2020 from 3.2x in 
2019 due to weak cash flow from operations. Leverage could decline to 4.5x in 
2021, based on our assumption of significant growth in 2021 against a weak 2020. 


Fitch expects the EBITDA margin to deteriorate amid declining revenue. 
Cost-reduction measures carried out by the company in response to the pandemic 
and low rental expenses thanks to a high proportion of self-owned stores will 
support recovery in profitability, but a shift in sales mix towards revenues 
other than concessionaire sales will weigh on the EBITDA margin in the medium 
term. 

Business Profile Intact: Golden Eagle's credit profile continues to be supported 
by a high proportion of self-owned stores and a broadening diversification of 
revenue. Its operating performance has been more resilient than peers in recent 
years as it makes continued investments in new store formats to cater to 
consumer needs. Stores in the format of lifestyle centres represented 79.2% of 
total gross floor area at end-2019, compared with 58.6% at end-2015. 

The company has also enriched merchandise selection and service offerings. 
Lifestyle elements contribute increasingly to total revenue, with direct sales 
and rental income accounting for 60% of total revenue in 2019, up from 47% in 
2015. However, the company remains very geographically concentrated, with the 
bulk of revenue generated from the Yangtze River delta area. 

Sufficient Near-Term Liquidity: Golden Eagle has ample liquidity to support 
business operations during this downturn. Its readily available cash of CNY0.9 
billion (reported CNY5.1 billion) was more than sufficient to cover short-term 
debt of CNY273 million at end-2019. In addition, it has unutilised banking 
facilities of CNY16 billion. It has USD430 million and HKD1,781 million in 
syndicated loans due in April 2021, of which Fitch expects Golden Eagle will 
refinance some of the outstanding balance.

Derivation Summary

Golden Eagle has a weaker market position and significantly smaller scale than 
Macy's Inc. (BB+/Negative), but benefits from potentially more favourable 
consumer demand, and has been more resilient after corrective actions taken over 
the last few years to offer more relevant retail formats. 

Golden Eagle has a smaller store footprint and higher leverage than Dillard's, 
Inc. (BB/Negative), which offset its stronger profitability than Dillard. Both 
companies are regionally concentrated. 

No Country Ceiling, parent/subsidiary or operating environment aspects have an 
impact on the rating

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Gross sales proceeds to decline by a quarter in 2020, with rental income and 
concessionaire declining by more than direct sales (2019: -1% excluding sale of 
properties) 

- EBITDA margin relative to operating revenue of 38% in 2020 and improving to 
41% in 2023 (2019: 42%), excluding the contribution related to property 
development

- Capex of CNY1 billion (including capex for projects under development) in 
2020-2023 (2019: CNY466 million, capex for projects under development is not 
included)

- 55% dividend payout rate annually (2019:50%)

RATING SENSITIVITIES

Developments That Could, Individually or Collectively, Lead to Positive Rating 
Action/Upgrade

- Operating performance avoiding the negative sensitivities below for a 
sustained period may lead to a revision of the Outlook to Stable

Developments That Could, Individually or Collectively, Lead to Negative Rating 
Action/Downgrade

- Payables adjusted FFO net leverage (adjusted for lease, payables and customer 
deposits) sustained above 4.5x (2019: 3.2x)

- EBITDA margin sustained below 40% (2019: 42%)

- Sustained negative free cash flow

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: Golden Eagle had readily available cash and cash 
equivalents of CNY0.9 billion (reported CNY5.1 billion) at end-2019, against 
short-term debt obligations of CNY0.3 billion. In addition, it had unutilised 
banking facilities of CNY16 billion.

Summary of Financial Adjustments

- Leases: Fitch has adjusted the debt by adding 8x annual fixed operating lease 
expenses (2019: fixed rental expense of CNY19 million)

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

- Operating EBITDA: Fitch treats the sale of properties and cost of properties 
sold as non-operating items and cash flow from the sale of properties as 
non-operating cash flow

- Readily available cash: Fitch has classified structured deposits as readily 
available cash (2019: CNY611 million)

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

ESG Considerations

ESG issues are credit neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Golden Eagle Retail Group Limited; Long Term Issuer Default Rating; Affirmed; 
BB; RO:Neg

----senior unsecured; Long Term Rating; Affirmed; BB

Contacts: 

Primary Rating Analyst

Crystal Guo, CFA, CPA

Associate Director

+852 2263 9608

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Li Chen, 

Associate Director

+86 21 6898 7976

Committee Chairperson

Kalai Pillay, 

Managing Director

+65 6796 7221

 

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10111917

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10090792

Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 
2020) 

https://www.fitchratings.com/site/re/10111386

Sector Navigators-Addendum to the Corporate Rating Criteria (pub. 27 Mar 2020) 

https://www.fitchratings.com/site/re/10112524

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0

1-https://www.fitchratings.com/site/re/968880

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10118599

Solicitation Status 

https://www.fitchratings.com/site/pr/10118599#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10118599#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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