Moody’s downgrades Li & Fung debt ratings
Moody’s Investors Service downgraded Li & Fung’s debt rating following the sale of its logistics segment.
Moody’s downgraded the company’s senior unsecured bond ratings to (1) Ba1 from Baa3, (2) interim (P)Ba1 from (P)Baa3 the rating of its unsecured medium-term note (MTN) program Senior Secured, (3) Provisional (P)Ba3 from (P)Ba2 its MTN Preferred Share Program rating, and (4) Ba3 from Ba2 its Perpetual Subordinated Notes rating.
Moody’s has also assigned a Ba1 corporate family rating (CFR) to Li & Fung Limited and removed the company’s Baa3 issuer rating.
Moody’s also revised the rating outlook to stable from ratings under review. This concludes the decommissioning review initiated on September 5, 2022.
Moody’s wrote in its analysis: “With the sale of LF Logistics Holdings Limited and its various entities in August to AP Moller-Maersk A/S (Baa2 positive), the diversity of Li & Fung’s business has been reduced to the commercial segment. , and its earnings base has shrunk. LF Logistics generated around two-thirds of Li & Fung’s adjusted EBITDA in 2021, although its contribution to overall revenue was only 20-25%.
“Li & Fung’s business has experienced multi-year revenue and profit declines due to structural difficulties faced by its retail customers. As the company progresses in the recovery of its business activity, its profits and profitability after the sale of its logistics segment will remain significantly below pre-2020 levels for at least the next few years.
“On the other hand, Moody’s expects Li & Fung’s adjusted net debt/EBITDA to decline to 1.5x-2.0x by 2023 from approximately 3.3x in 2021. Adjusted debt/EBITDA will decline also at less than 5x in 2023 versus approximately 7x in 2022. These forecasts are based on assumptions that (1) the company will use more than half of the proceeds for debt reduction and building up a cash reserve; and (2) earnings will gradually rebound and capital expenditures will be weak, supporting positive free cash flow.
“As the improved capital structure only partially offsets the weakening of its business profile, Li & Fung’s overall credit profile is more in line with the Ba1 rating.
“Li & Fung’s Ba1 ratings incorporate the company’s unique position in the global consumer products sourcing and trading market, high levels of customer and supplier diversification, long operating history and prudent financial management resulting in very good liquidity. Its asset-light business model also means low capital expenditure requirements, allowing it to generate free cash flow from 2023.
“At the same time, the ratings reflect the company’s concentrated operations in trading, low margins and profits, as well as execution risks associated with the recovery of trading activities.
“Li & Fung’s business operations improved in 2021 and rebounded further in terms of revenue and profit in the first half of 2022 compared to a year ago. Moody’s expects operating performance continues to improve, driven by a strengthened customer base, improved services and reduced costs.
“That said, there is a degree of uncertainty stemming from reduced consumer demand amid a slowing global economy and the company’s limited track record of business recovery.
“Li & Fung’s liquidity remains very good, with enough cash to cover its short-term debt and most of its long-term debt only maturing in 2024 and 2025.
“In terms of environmental, social and governance (ESG) considerations, the ratings take into account social risks related to shifts in consumer preferences towards online shopping, which has resulted in structural weakness for traditional retailers and commercial businesses. In terms of governance risk, the ratings take into account the good credibility of Li & Fung’s management and its prudent financial policy, as illustrated by its very long operating history and its continuous reductions in the debt.