Moody’s Investors Service lowered the debt ratings of Li & Fung following the sale of its logistics segment.
Moody’s downgraded to Ba1 from Baa3 the company’s senior unsecured bond ratings; provisional Ba1 from Baa3 its senior unsecured medium-term note (MTN) program rating; provisional Ba3 from Ba2, its preferred stock MTN program rating; and Ba3 from Ba2, its subordinated perpetual capital securities rating.
Moody’s also assigned a Ba1 corporate family rating (CFR) to Li & Fung, Ltd. and withdrew the company’s Baa3 issuer rating.
Moody’s has also revised its rating outlook to stable from ratings under review. This concludes the review for the downgrade 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 A.P. Moller-Maersk A/S (Baa2 positive), Li & Fung’s business diversity has been reduced to the trading segment, and its earnings base has shrunk. LF Logistics generated about two-thirds of Li & Fung’s adjusted EBITDA in 2021, even though its contribution to overall turnover was only 20 percent to 25 percent.
“Li & Fung’s trading business experienced multi-year declines in revenue and earnings as a result of structural difficulties faced by its retail customers. While the company is making progress in its turnaround of the trading business, its earnings and profitability after the sale of its logistics segment will remain significantly below pre-2020 levels at least over the next several 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 around 3.3x in 2021. Adjusted debt/EBITDA will also decline to below 5x in 2023 from around 7x in 2022. These forecasts are based on assumptions that the company will use more than half of the proceeds for debt reduction and building a cash buffer and earnings will gradually rebound and capital spending will be low, which will support positive free cash flow.
“Given that the improvement in capital structure only partially offsets the weakening in its business profile, Li & Fung’s overall credit profile is more commensurate with the Ba1 rating.
“Li & Fung’s Ba1 ratings incorporate the company’s unique market position in the global sourcing and trading of consumer products, high levels of customer and supplier diversification, long operating track record, and prudent financial management resulting in very good liquidity. Its asset-light business model also means low capital spending requirements, allowing it to generate free cash flow starting in 2023.
“At the same time, the ratings reflect the company’s concentrated operations in trading, low margins and earnings, as well as execution risks in turning around the trading business.
“Li & Fung’s trading business improved in 2021 and further rebounded in both turnover and earnings in the first half of 2022 compared with a year ago. Moody’s expects operating performance to continue to improve, driven by a strengthened customer base, improved services and reduced costs.
“That said, there is a degree of uncertainty arising from reduced consumer demand amid a slowing global economy and the company’s limited track record of sustaining business recovery.
“Li & Fung’s liquidity remains very good, with ample cash to cover its short-term debt and most of its long-term debt maturing only in 2024 and 2025.
“In terms of environmental, social and governance (ESG) considerations, the ratings factor in social risks from changes in consumer preference towards online shopping, which has resulted in structural weakness for traditional retailers and the company’s trading business. In terms of governance risk, the ratings consider Li & Fung’s good management credibility and prudent financial policy, as illustrated by its very long operating history and continued debt reductions.”
