OREANDA-NEWS. July 06, 2015. Fitch Ratings has assigned LS Finance (2025) Limited's USD300m 4.5% senior notes due 2025 a final rating of 'BBB-'. The notes are unconditionally and irrevocably guaranteed by Hong Kong-based Lifestyle International Holdings Limited (Lifestyle; BBB-/Stable).

The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 11 Jun 2015.

KEY RATING DRIVERS

HK Business Remains Resilient: Causeway Bay (CWB) SOGO currently accounts for more than 70% of Lifestyle's sales and over 80% of its EBITDA. It registered same-store sales growth of 3.4% compared with the industry's 1.4% in 2014. Management indicated that same-store sales for CWB SOGO declined in 1Q15 from a year earlier, due to a continued decrease in tourist spending and weak local demand. We expect the store to continue to outperform the industry because of its prime location and widespread recognition; however, same-store sales may fall by a low single-digit percentage in 2015.

Lifestyle's Tsim Sha Tsui SOGO store was closed in February 2014 and reopened in November 2014. It also recently opened its supermarket and catering business in May 2015. We expect sales at the Tsim Sha Tsui store to ramp up in 2015-2016, compensating for the slowdown in CWB SOGO.

Mainland Stores Bottoming Out: Mainland China now accounts for 27% of Lifestyle's total sales proceeds, 21% of revenue and 16% of EBITDA. The four stores in Shanghai, Suzhou, Dalian and Shenyang were under pressure in 2014 due to fierce competition and soft consumption. Same-store sales increased in the Shanghai, Suzhou and Shenyang stores in 1Q15 after gathering momentum from 2H14.

Healthy Credit, Conservative Capex: Lifestyle maintained funds from operations (FFO) fixed charge coverage and FFO adjusted net leverage ratios comfortably at 4.03x and 1.54x, respectively, in 2014. The company had HKD8.3bn in available cash at hand at end-2014, enough to cover HKD8bn of debt due in the next three years. Capex in 2015 will mainly focus on its Shanghai Zhabei Project, reaching HKD1bn in total, which is conservative compared with the group's EBITDA of more than HKD2bn.

Bond Rating Unaffected by Refinancing: Given Lifestyle's strong financial position, Fitch expects Lifestyle to be able to successfully refinance or repay its syndicated loan secured by CWB SOGO and East Point Center, which will mature in 2016. Fitch does not expect the senior unsecured bond rating to be notched down, given its senior secured debt/EBITDA ratio is 1.7x and the refinancing will not affect this ratio.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- CWB SOGO: Total sales to fall in 2015 and increase by a low single-digit percentage in 2016, followed by 5% growth in 2017-2018
- TST SOGO: Total sales will reach HKD1bn in 2015
- Capex: HKD1bn each year in 2015-2017

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Faster or more aggressive expansion in China than planned by the management
- Significant changes to its business model, such as moving away from the concession model
- FFO fixed-charge coverage is below 3.0x and FFO net leverage stays above 2.5x on a sustained basis
- Senior unsecured debt will be notched down if the senior secured debt / EBITDA ratio rises above 2x and unsecured assets/unsecured debt ratio falls below 2x
Positive: Although no positive rating action is envisaged over the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include:
- Material diversification away from CWB Sogo without any loss in profitability
- FFO fixed-charge coverage above 5.5x and FFO net leverage stays below 1.0x on a sustained basis
Contact:

Primary Analyst
Vicki Shen
Associate Director
+852 2263 9918
Fitch (Hong Kong) Limited
28th Floor, Two Lippo Center
89 Queensway, Hong Kong

Secondary Analyst
Chloe He
Associate Director
+852 2263 9967

Committee Chairperson
Kalai Pillay
Senior Director
+65 6796 7221

Date of Relevant Rating Committee: 13 May 2015

Additional information is available on www.fitchratings.com

Fitch Ratings has assigned LS Finance (2025) Limited's USD300m 4.5% senior notes due 2025 a final rating of 'BBB-'. The notes are unconditionally and irrevocably guaranteed by Hong Kong-based Lifestyle International Holdings Limited (Lifestyle; BBB-/Stable).

The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 11 Jun 2015.

KEY RATING DRIVERS

HK Business Remains Resilient: Causeway Bay (CWB) SOGO currently accounts for more than 70% of Lifestyle's sales and over 80% of its EBITDA. It registered same-store sales growth of 3.4% compared with the industry's 1.4% in 2014. Management indicated that same-store sales for CWB SOGO declined in 1Q15 from a year earlier, due to a continued decrease in tourist spending and weak local demand. We expect the store to continue to outperform the industry because of its prime location and widespread recognition; however, same-store sales may fall by a low single-digit percentage in 2015.

Lifestyle's Tsim Sha Tsui SOGO store was closed in February 2014 and reopened in November 2014. It also recently opened its supermarket and catering business in May 2015. We expect sales at the Tsim Sha Tsui store to ramp up in 2015-2016, compensating for the slowdown in CWB SOGO.

Mainland Stores Bottoming Out: Mainland China now accounts for 27% of Lifestyle's total sales proceeds, 21% of revenue and 16% of EBITDA. The four stores in Shanghai, Suzhou, Dalian and Shenyang were under pressure in 2014 due to fierce competition and soft consumption. Same-store sales increased in the Shanghai, Suzhou and Shenyang stores in 1Q15 after gathering momentum from 2H14.

Healthy Credit, Conservative Capex: Lifestyle maintained funds from operations (FFO) fixed charge coverage and FFO adjusted net leverage ratios comfortably at 4.03x and 1.54x, respectively, in 2014. The company had HKD8.3bn in available cash at hand at end-2014, enough to cover HKD8bn of debt due in the next three years. Capex in 2015 will mainly focus on its Shanghai Zhabei Project, reaching HKD1bn in total, which is conservative compared with the group's EBITDA of more than HKD2bn.

Bond Rating Unaffected by Refinancing: Given Lifestyle's strong financial position, Fitch expects Lifestyle to be able to successfully refinance or repay its syndicated loan secured by CWB SOGO and East Point Center, which will mature in 2016. Fitch does not expect the senior unsecured bond rating to be notched down, given its senior secured debt/EBITDA ratio is 1.7x and the refinancing will not affect this ratio.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- CWB SOGO: Total sales to fall in 2015 and increase by a low single-digit percentage in 2016, followed by 5% growth in 2017-2018
- TST SOGO: Total sales will reach HKD1bn in 2015
- Capex: HKD1bn each year in 2015-2017

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Faster or more aggressive expansion in China than planned by the management
- Significant changes to its business model, such as moving away from the concession model
- FFO fixed-charge coverage is below 3.0x and FFO net leverage stays above 2.5x on a sustained basis
- Senior unsecured debt will be notched down if the senior secured debt / EBITDA ratio rises above 2x and unsecured assets/unsecured debt ratio falls below 2x
Positive: Although no positive rating action is envisaged over the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include:
- Material diversification away from CWB Sogo without any loss in profitability
- FFO fixed-charge coverage above 5.5x and FFO net leverage stays below 1.0x on a sustained basis