OREANDA-NEWS. Fitch Ratings has placed China-based department store operator Golden Eagle Retail Group Limited's (Golden Eagle) Long-Term Issuer Default Rating (IDR) and senior unsecured rating of 'BB+' on Rating Watch Negative (RWN). Fitch has also placed on RWN the 'BB+' rating of the USD400m 4.625% senior notes due 2023.

The action reflects deterioration of Golden Eagle's operating environment and Fitch's view that credit metrics may no longer justify the current rating level. 4Q15 operating data from other Chinese retailers suggest weak consumer spending and Fitch believes Golden Eagle is unlikely to be immune. Fitch will review Golden Eagle's rating after the 2015 annual results are announced on 30 March 2016, at which point a negative rating action is highly likely.

KEY RATING DRIVERS

Challenging Retail Market: The operating environment for Golden Eagle has been difficult in the past two to three years due to changing consumer behaviour and a lack of differentiation among department stores. Golden Eagle's same-store sales started declining in 2014 and fell by 1.6% in 1H15. The company has taken steps to stem the slide, such as adding more lifestyle elements to its stores, and has performed better than some peers. That said, the success of these efforts depends on consumer sentiment, which continues to weaken.

2H15 Likely Weaker: Recent data from China's retailers suggest conditions are continuing to deteriorate in 2H15. For example, Parkson Retail Group Limited (B/Negative) saw same store sales decline 8% in the 2015 financial year (FY), compared to a 4.5% drop in 1H15. Similarly, New World Department Store China Limited reported same store sales declined 8.5% in the six months ended December 2015, compared to a 7% decline in FY15.

Higher Leverage: Golden Eagle's payables adjusted net leverage increased to 3.27x by the end of 2014 from 2.3x in the previous year. Fitch estimates this may exceed 4x by the end of 2015, given weaker cash generation and ongoing capex requirements. The company also made several acquisitions over the past year, which would increase its leverage.

Adequate Liquidity: The company's unrestricted cash and cash equivalents remained robust at CNY4.3bn as at June 2015. This is sufficient to cover its short-term debt of CNY644m and near-term capex requirements. Golden Eagle's annual capex budget of around CNY1.5bn for store expansion in 2015-2017 is flexible, as it plans to acquire some stores from its parent. This will allow for favourable terms, such as timing of acquisitions and mode of payment.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- neutral to slight decline in same-store sales growth in China
- contracting EBITDA margins
- capex: CNY1.2bn-1.5bn per year

RATING SENSITIVITIES

Negative: Future developments that may individually or collectively lead to negative rating action include:
- Payables adjusted net leverage (adjusted for lease, payables and customer deposits) being sustained above 3.75x
- EBITDA margin being sustained below 40% (2014: 43.5%)
- sustained negative free cash flow

Positive: the rating is on Watch Negative. The likelihood of positive rating action is low.