Fitch Ratings has revised Vietnam-based property developer Hoang Anh Gia Lai JSC's (HAGL) Outlook to Negative from Stable. Its Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) have been affirmed at 'B'. The agency has also downgraded HAGL's senior unsecured rating and its USD90m notes to 'B-' from 'B', and revised the Recovery Rating on the notes to 'RR5' from 'RR4'.
The Outlook revision reflects the higher credit risk faced by HAGL due to a sharp drop in property sales in Ho Chi Minh City. As a result, HAGL was saddled with completed, but unsold, inventory of VND3.5trn at end-2011. In addition, the company's net debt increased to VND8.7trn at end-2011 from VND2.3trn a year earlier, following accelerated non-property related capex. This far exceeded Fitch's previous expectations and has worsened recovery prospects on HAGL's senior unsecured debt.
HAGL is addressing these problems although at present, it is unclear whether these efforts will be sufficient to avert further deterioration in HAGL's financial profile, particularly in light of a VND1.1trn currently out-of-the-money convertible bond maturity in August 2013.
HAGL has no plans to launch new property projects in the near term and instead, is focusing on liquidating its existing inventory. More promisingly, some of its non-property related businesses have commenced operations and will likely improve cash flow from operations in 2012. The company has begun selling iron ore in 2011. Furthermore, three of its planned 17 hydro power projects have begun generating power and more are likely to come onstream in 2012.It is also likely to significantly reduce capex materially in 2012, though management is committed to expanding the hydro power and rubber plantation business.
Further negative action may be taken if the company is not on track to meaningfully reduce property inventory or if, in any quarter this year, funds from operations interest coverage falls below 2.0x.
The rating Outlook may be revised to Stable only when the company's property inventory has been substantially liquidated and the iron ore and hydro power businesses begin contributing meaningfully to the company. These events will alleviate current liquidity risks.