S&P affirms and then drops HAG 'B-' rating

Oct 2nd at 10:07

02-10-2012 10:07:15+07:00

-- We expect Vietnam-based property developer HAGL to service about US$3.7 million in interest payments due November 2012.

-- We are affirming the 'B-' long-term corporate credit rating on HAGL and the 'B-' issue rating on the company's senior unsecured notes due 2016. We are also affirming the 'axB-' long-term ASEAN regional scale rating on the company.

-- Our negative outlook on the affirmed rating on HAGL factored in the company's weak liquidity and limited visibility on improving cash flow generation from its real estate sales, iron ore sales, and rubber plantation projects in the next six to 12 months.

-- We are withdrawing all ratings at the company's request.

Standard & Poor's Ratings Services said today that it affirmed its 'B-' long-term corporate credit rating on Vietnam-based property developer Hoang Anh Gia Lai Joint Stock Co. (HAGL) with a negative outlook. At the same time, we affirmed the 'B-' issue rating on the company's senior unsecured notes due 2016. We then withdrew the rating at HAGL's request.

"At the time of the withdrawal, the rating on HAGL reflected our view of the company's weak liquidity, high risks associated with the execution of its aggressive expansion plans, its volatile cash flow, and weak liquidity. HAGL's favorable cost structure for property development and established brand name in Vietnam tempered these weaknesses," said Standard & Poor's credit analyst Wee Khim Loy.

HAGL's business risk profile prior to the rating withdrawal was "vulnerable" and its financial risk profile was "highly leveraged," as our criteria define the terms.

In our view, the challenging business conditions in the next six to 12 months will continue to undermine HAGL's performance and add pressure to cash flows. In the first half of 2012, HAGL's operating profit fell sharply to Vietnamese dong (VND) 258.3 billion, compared with VND1,706 billion in full-year 2011. We expect HAGL's property sales to stay depressed for the rest of 2012 because of volatility in the Vietnamese dong, relatively high interest rates, and property buyers' cautiousness toward real estate purchases.

Sales of electricity from hydropower projects will only modestly offset the sharp decline in property sales for the rest of 2012, in our view. Revenue from apartment sales dropped to VND598 billion in the first half of 2012, compared with VND1,766 billion for 2011. We also do not expect the company's iron ore mines to generate meaningful cash flows in the next six months.

We estimate HAGL's capital expenditure for 2012 at about VND4.6 trillion. The company incurred about VND3.6 trillion of this expenditure in the first half of 2012. We assume that the rest of the spending on hydropower stations, mining, and rubber plantations is discretionary and can be deferred if HAGL's liquidity remains weak.

We assessed HAGL's liquidity prior to the rating withdrawal as "weak," as defined in our criteria. We estimated that the company's cash sources in 2012 would be less than 1x of its uses due to its aggressive capital expenditure on rubber plantations, hydropower stations, and iron ore projects. Our assumptions were as follows:

Sources of liquidity include:

-- A cash balance of VND2.6 trillion as of June 30, 2012;

-- VND850 billion in bonds issued in August 2012; and

-- The divestment of stakes in a hydropower subsidiary for VND313 billion.

Uses of liquidity include

-- Repurchase of US$15 million bonds in July 2012; and

-- Committed capital expenditure of about VND1 trillion, predominantly allocated to non-real estate businesses.

Our liquidity assessment also factored in HAGL receiving continuous support from banks to roll over short-term debts and the company's good access to the local capital markets. We assumed that more than 80% of the short-term debts were related to hydropower, mining, and rubber plantation projects, which are sectors that the government encourages, unlike real estate. We have not factored in the launch of two projects, Thanh Binh and Phu Hoang Anh, in the last quarter of 2012 in our liquidity assessment.

"The negative outlook on HAGL prior to the withdrawal reflected our view that the company's liquidity could remain weak over the next 12 months," said Ms. Loy.

Our view was based on our expectation that HAGL's apartment sales would remain depressed in the next six to 12 months. Moreover, the company's committed capital expenditure is large. The improvement in its liquidity would likely rely on certain sources of funds, such as asset sales.

At the time of the withdrawal, the upside potential to the rating was limited in the next 12 months, given the risks highlighted above.

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