Moody’s Investors Service has placed on review for downgrading Li & Fung Limited’s ratings. The review follows the company’s announcement on August 31 that it had completed the sale of LF Logistics Holdings, Ltd. and its entities to A.P. Moller-Maersk A/S. These include the company’s Baa3 issuer rating, Baa3 senior unsecured bond ratings, provisional (P)Baa3 senior unsecured medium-term note (MTN) program rating, provisional (P)Ba2 preferred stock MTN program rating and subordinated Ba2 perpetual capital securities rating.
The previous outlook on the company was negative.
“The review for downgrade reflects Li & Fung’s significantly weakened business profile and reduced earnings base after the transaction, which will more than offset a likely material improvement in its net financial leverage,” said Gloria Tsuen, a Moody’s vice president and senior credit officer.
Moody’s said in its analysis, “LF Logistics has a record of strong growth over the past decade and generated about two-thirds of Li & Fung’s adjusted EBITDA in 2021, even though its contribution to overall turnover was moderate at 20 percent-25 percent, reflecting its higher margins than the trading business.
“Consequently, after the sale of the logistics segment, Li & Fung’s business diversity has been reduced to trading, which experienced multiyear declines in revenue and earnings as a result of structural difficulties faced by its retail customers.
“Given these factors, in Moody’s view, Li & Fung’s overall business profile is not commensurate with the Baa3 rating. This view is despite an expected material improvement in its capital structure after the transaction and progress in the turnaround in the trading business.
“Moody’s expects Li & Fung’s capital structure to improve significantly after the transaction, assuming that the company maintains its prudent management and uses more than half of proceeds for debt reduction and building a cash buffer.
“The company’s trading revenue and EBITDA rebounded strongly in the first half (H1) of 2022 from H1 2021, as it has strengthened its customer base and reduced costs.
“Although these measures will help to boost revenue and earnings of the trading segment, there is a degree of uncertainty over whether the company can sustain such a positive trend over the next 2-to-3 years, given reduced consumer demand amid a slowing global economy and execution risks.
“Moody’s review will focus on (1) the trajectory of growth and profitability of the trading segment and (2) the use of sale proceeds and Li & Fung’s capital structure after the sale.”
