Lifestyles' USD bond issuance gets Baa3 rating from Moody's

The proposed bond issuance will increase Lifestyle's near-term debts but funding stability will also improve, says Moody's.

Moody's Investors Service has assigned a Baa3 rating to the proposed USD bonds to be issued by LS Finance (2022) Limited, a wholly-owned subsidiary of Lifestyle International Holding Ltd., which will guarantee the bonds.

These bonds will be issued under similar terms and conditions as those issued by LS Finance (2017) Limited in January 2012.

At the same time, Moody's has affirmed Lifestyles' Baa3 issuer rating.

The proposed USD bonds are intended to be used for debt repayment, capital expenditures relating to new department store projects in the future, and other general corporate purposes.

"While the proposed bond issuance will increase Lifestyle's near-term adjusted Debt/EBITDA -- measured on the basis of the last 12 months -- to more than 4.5x from 3.8x, it will also improve its funding stability
through lengthening its debt maturity profile. In addition, it will further enhance its already strong level of balance sheet liquidity, which includes cash on hand of over HKD8 billion as of end-June 2012," says Jonathan Lee, a Moody's Vice President and Senior Analyst.

Moody's expects Lifestyle will ramp up its China operations and its debt leverage will remain within the Baa3 range in the next 12 to 18 months, while adjusted Debt/EBITDA and adjusted Net Debt/EBITDA will be around
3.9x and 1.5x respectively.

"The bond issuance also represents a continuation of Lifestyle's prudent financial management of prefunding for its China expansion that targets to reduce its revenue concentration in Hong Kong," says Lee, also the lead analyst for Lifestyle.

Moody's expects Lifestyle to execute expansion in China at a prudent pace and will continue its approach of cautious selection of acquisition targets on the Mainland.

Here's more from Moody's

Lifestyle's Baa3 rating continues to reflect its established operating track record and resilient cash flow through various down-cycles.

It also reflects the successful business model of its flagship SOGO store in Hong Kong that is supported by: (a) an active management of concessionaires and product mix; (b) low inventory levels; (c) its landmark property status as it is located in the prime shopping area of Causeway Bay; (d) its high level of customer loyalty; and (e) the positive growth in retail consumption in Hong Kong and the increase in the number of tourists.

The stable outlook reflects Moody's expectation that the company will continue to generate strong and sustainable cash flow in Hong Kong, and remain prudent in its expansion in China over the medium term.

An upgrade in the near term is unlikely, given the company's revenue concentration and its moderate scale. However, upgrade pressure on the rating could emerge in the medium term if the company: (1) demonstrates
execution capability, while prudently managing its expansion plan in China; and (2) maintains a track record of stable cash flow and achieves improved credit metrics - adjusted Debt/EBITDA less than 2.5x - 3.0x and
RCF/adjusted debt above 20% on a sustained basis.

Downward rating pressure would arise if: (1) there is any material deterioration in the profitability or cash flow of the company's stores in Hong Kong; (2) the company fails to improve revenue contributions from China and ramp up its stores in China; or (3) the company adopts a more aggressive debt-funded expansion plan in China, which substantially weakens its balance sheet liquidity.