OREANDA-NEWS. Fitch Ratings has downgraded China-based department store operator Parkson Retail Group Limited's (Parkson) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'B+' from 'BB-'. The ratings have been removed from Rating Watch Negative. Fitch has assigned a Negative Outlook to the ratings and a Recovery Rating of 'RR4' to the senior unsecured rating.

The downgrade reflects the continued deterioration in Parkson's core business and its rising leverage despite the cancellation of the proposed Parkson Retail Asia Limited (PRA) acquisition. The Negative Outlook reflects the uncertainty over when same-store sales will stabilise.

KEY RATING DRIVERS
Declining Sales and Profitability: Parkson's fundamentals have steadily deteriorated over the past three years due to weaker consumer spending and competition from other retail formats, such as e-commerce and shopping malls. Same-store sales declined 4.6% and same-store profits fell 25% yoy in 1H15. Of the 60 stores in operation, 23 were unprofitable in 1H15. Parkson's heavy reliance on rented properties has exacerbated the impact of the sales decline on margins. EBITDA has fallen to 2%-3% of Gross Sales Proceeds, compared with EBITDA margins in the low teens for most department store operators rated by Fitch.

High Leverage: Fitch expects Parkson's payables-adjusted FFO net leverage to remain elevated at more than 6.3x, which is not in line with levels expected for a 'BB' category rating. Parkson's minority shareholders at an extraordinary general meeting on 12 October 2015 rejected a proposed acquisition of a stake in PRA for CNY1.05bn. The cancellation of the deal is a marginal positive; but it does not offset the decline in Parkson's core operations in China.

Share Buybacks Continue: Parkson has been repurchasing shares through the Hong Kong Stock Exchange since 2013. Over the past three years, the company has bought back more than 4% of total shares outstanding using cash, and it has so far in 2015 already spent CNY52m on share buybacks.

Adequate Liquidity: Parkson's liquidity position remains healthy, despite rising leverage. Liquidity is supported by its cash-generating concessionaire business and CNY3.9bn in cash and investments in principal-guaranteed deposits as of June 2015. USD500m of bonds mature in 2018 and its bank borrowings are fully secured with time deposits and principal-guaranteed deposits.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Gross sales proceeds decline by 1.5% a year in 2016-18
- EBITDA margin of 11%-12% in 2016-18
- CNY900m capex in 2015 and CNY500m a year thereafter

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Same-store sales growth stabilises or turns positive on a sustained basis

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO fixed-charge coverage at less than 1.3x on a sustained basis
- Payables adjusted (adjusted net debt plus 85% trade payables and customer deposits) FFO net leverage sustained above 7x
- Continued deterioration in same-store sales and margins