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S&P places HAGL 'B' rating on watch negative
Standard & Poor's Ratings Services said today that it had placed its 'B' long-term corporate credit rating and 'axBB-' ASEAN scale rating on Vietnam-based Hoang Anh Gia Lai Joint Stock Co.(HAGL) on CreditWatch with negative implications. We also placed the 'B' issue rating on the company's US$90 million senior notes due 2016 on CreditWatch with negative implications.
We placed the ratings on HAGL on CreditWatch with negative implications because we anticipate that the company's credit profile could deteriorate in the next six to 12 months. The performances of HAGL's core property development and iron ore mining businesses are likely to be significantly weaker than we had expected. Our original expectation that the company's credit profile would improve was based on the significant ramp up of its iron ore mining business in the second half of 2011 and the continued strong performance of its property development business.
"We now believe that HAGL's credit profile may be weaker than our stress-case scenario for the rating. This is attributable to the difficult operating environment in Vietnam, which includes persistently high interest rates and inflation, culminating in property buyers' reduced purchasing power," said Standard & Poor's credit analyst Wee Khim Loy. "We did not anticipate the delay in obtaining licenses for the Laos and Cambodia iron ore mines, and we now expect the company's production to be materially lower at 300,000 tons in 2011, compared with our original forecast of 700,000 tons."
HAGL generated negative cash flow from operations of Vietnamese dong (VND) 691.0 billion due to a 25% drop in sales to VND797.5 billion in the first six months of 2011, compared with positive cash flow of VND456.2 billion and revenue of VND1.0 trillion for the same period in 2010.
The rating on HAGL reflects the company's exposure to: the cyclicality inherent in the mining and real estate industries; and the capital intensity and project execution risks associated with its diversification into iron ore mining, hydropower generation, and rubber manufacturing. The rating also reflects the economic, political, and regulatory risks of operating in Laos and Cambodia. HAGL's low-cost land bank and established brand name in Vietnam temper these weaknesses.
"We expect to resolve the CreditWatch placement after further discussions with HAGL's management regarding the company's strategy to offset the effects of a challenging operating environment," said Ms. Loy.
A CreditWatch negative listing implies a one-in-two likelihood that we may lower the rating within the next three months. We could lower the rating by one notch if, in our opinion, the weak macroeconomic environment continues to negatively affect HAGL's property sales, and the iron ore mining licenses are delayed further, undermining the company's performance and credit protection measures.
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