OREANDA-NEWS. S&P Global Ratings today said it has revised to negative from stable its outlook on its rating on Japan-based shopping mall operator AEON Mall Co. Ltd. At the same time, we affirmed our 'BBB+' long-term corporate credit rating on the company.

The downward revision of the outlook on our rating on AEON Mall, which is highly integral to the AEON group (AEON Co. Ltd. (AEON) (BBB+/Negative/--)), follows our downward revision of the outlook on our ratings on its parent, AEON, to negative from stable.

AEON Mall has established a strong position in shopping center development and management, with an excellent ability to develop and manage shopping malls and with AEON group's high brand recognition. In addition, the company holds and manages a high-quality property portfolio that generates stable rental income. At the same time, we see some constraints on AEON Mall's business risk profile, such as moderately high dependence on the AEON group, arising from a certain degree of concentration on the group for its tenants, and implementation risk in developing shopping malls overseas. Nevertheless, we view AEON Mall's competitiveness in development and management of shopping malls as unlikely to change considerably for the next two to three years. Accordingly, we continue to assess AEON Mall's business risk profile as strong.

Financial metrics for AEON Mall remain relatively favorable: As of the end of fiscal 2015 (ended Feb. 29, 2016), EBITDA interest coverage was 6.0x and the ratio of funds from operations (FFO; before adjustments for changes in working capital) to debt was 14.2%. These financial metrics deteriorated slightly year on year and will be slow to recover in the next one to two years because the company intends to proactively invest in Japan and overseas, including in China and Association of Southeast Asian Nations countries. However, we expect them to remain within the range assumed for our assessment of AEON Mall's financial risk profile as modest. In addition, we have not drastically changed our base-case scenario for AEON Mall.

We view AEON Mall's liquidity as adequate. We expect its liquidity sources to exceed more than 1.2x uses in the next 12 months. The company has continuous access to capital markets through corporate bond issuance and strong relationships with financial institutions.

We continue to assign AEON Mall an 'a-' stand-alone credit profile (SACP), which incorporates its business risk profile, financial risk profile, and modifiers. It also excludes the likelihood of extraordinary support from the parent group. This SACP exceeds the 'bbb+' group credit profile (GCP) for AEON group. We regard AEON Mall as a highly strategic subsidiary of AEON group because we believe the company's business is highly integral to the group's strategy and operations. This leads us to believe the rating on AEON Mall is unlikely to exceed the GCP for AEON group even when the SACP for AEON Mall exceeds the GCP for AEON group.

The outlook on the long-term rating on AEON Mall is negative. We expect AEON Mall to maintain a strong financial base thanks to stable rental income from its high-quality properties, underpinned by its excellent ability to develop and manage shopping malls and the AEON group's brand recognition. On the other hand, we regard a degree of concentration on AEON group for tenants as a constraint on AEON Mall's credit quality.

We may consider lowering the rating on AEON Mall if we lower the GCP for AEON group. In a downgrade scenario, operating profit from AEON's retail business would decline despite reform of its general merchandising store (GMS) business; AEON's consolidated operating profit would decrease from the previous year as a result of, for instance, a delay in restructuring the group's businesses; or the likelihood of AEON improving its financial metrics sustainably would become remote because of aggressive investments and higher dependence on debt as a result of looser financial discipline. Specifically, we may downgrade AEON Mall if we believe debt to EBITDA for AEON would remain above 4x at the end of fiscal 2016 (ending Feb 28, 2017). In addition, we would downgrade AEON Mall if its SACP fell below the GCP for AEON group as aggressive investments led to deterioration in AEON Mall's financial profile. However, AEON Mall's solid and stable business characteristics produce a low likelihood of the latter scenario for the foreseeable future.

Conversely, while the SACP for AEON Mall is equal to the GCP for AEON group or exceeds it, we would revise to stable the outlook on our rating on AEON Mall if we were to revise to stable the outlook on our rating on AEON because a full-scale recovery in AEON's retail business' profits and proper management of investments and debt had produced an improvement in its financial profile exceeding our assumptions. This will be the case if AEON's debt to EBITDA falls below 4x and continues to ease on a sustained basis.