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RETAIL | Staff Reporter, Hong Kong
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Li & Fung's 2015 core operating profit fell 15%

Key US and Europe markets had tough enviroments.

Moody's Investors Service says that Li & Fung's weak 2015 results are credit negative but will not immediately affect the company's Baa1 issuer and senior unsecured bond ratings or the Baa3 rating on its perpetual securities.

According to a release from Moody's Investors Service, Li & Fung's key end markets for retail consumer goods in the US and Europe continue to be characterized by intense competition and subdued consumer spending. Currency uncertainties in the Eurozone and slowing economic growth in China have also challenged the company.

"The tough environment for the retail industry in Li & Fung's key US and European markets resulted in the company reporting a 15% fall in core operating profit for the fiscal year ended 31 December 2015, and a modestly weaker financial profile," says Joe Morrison, a Moody's Vice President and Senior Credit Officer.

As a result, Li & Fung reported that its core operating profit margin fell to 2.7% in 2015 from 3.1% in 2014.

Here's more from Moody's Investors Service:

In addition, the company's adjusted debt/EBITDA and EBITDA interest coverage deteriorated to about 2.9x and 6.1x respectively in 2015 from 2.7x and 6.6x in 2014. These ratios remain consistent with the parameters of its Baa1 issuer and senior unsecured debt ratings but provide little headroom for further deterioration at this rating level.

"Nevertheless, in our view, the company has the ability and willingness to curb the pressure on its financial leverage by prudently controlling its cash outflows and debt levels," adds Morrison.

Moody's expects that Li & Fung's profitability will continue to come under pressure over the next 12-18 months, given that the challenging macroeconomic and industry conditions are unlikely to abate.

Nonetheless, Moody's anticipates that Li & Fung's adjusted debt/EBITDA will remain stable at about 3.0x, and its EBITDA interest coverage will remain at about 6.0x in 2016, as the company contains its debt levels. Li & Fung's liquidity profile remains strong. Moody's expects that the company's operating cash flow will total about $500 million in 2016.

At 31 December 2015, its cash and bank balances totaled about $342 million and availability under committed bank facilities totaled $653 million. These sources of liquidity were more than sufficient to cover its short-term debt of $96 million, annual capex of about $90 million, and a dividend in line with the company's historical payout ratio of approximately 60% of core operating profit.

Given the difficult operating environment, Moody's does not anticipate that Li & Fung's ratings will face upward pressure over the next 1-2 years.

However, if the company's business and financial profiles deteriorate further, its ratings and outlook will come under pressure. In particular, Moody's would consider taking negative rating actions if Li & Fung's profitability falls, its adjusted EBITDA interest coverage trends below 5.5x-6.0x and/or adjusted debt to EBITDA exceeds 3.0x-3.5x.

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