Easyhome Outlook Revised To Negative On Weakening Operating Conditions; Ratings Affirmed At 'BB+'

  • The COVID-19 outbreak's hit to consumer demand presents an unprecedented test for China's furnishing shopping mall operators.
  • We expect Beijing Easyhome Investment Holding Group Co. Ltd. (Easyhome) to see income loss and weakening performance due to rent concessions and the closure of malls for one month.
  • On March 24, 2020, S&P Global Ratings revised its outlook on Easyhome to negative from stable and affirmed its 'BB+' long-term issuer credit rating on the company. At the same time, we affirmed our 'BB+' long-term issue rating on the company's guaranteed senior unsecured notes.
  • The negative outlook reflects our expectation that Easyhome's cash flow could fall amid the outbreak and the unpredictability of a market rebound.
HONG KONG (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above.
The outlook revision to negative reflects our view that Easyhome's business performance is weakening due to the adverse effects of the COVID-19 outbreak and a possible prolonged hit to consumer demand.
We affirmed the rating because we expect Easyhome can maintain good funding access due to its solid market position in China's home improvement and furnishing industry, and a market rebound could partly offset the short-term impact on its business. We believe being able to obtain policy support, including a "pandemic bond" quota from the government and securing a bank loan with a low interest rate of 3.0%-4.3% amid the outbreak, will somewhat mitigate the company's refinancing risks.
Nonetheless, the outbreak and the potential longer-term dampening of consumer confidence could leave the company facing volatile income. Given its business concentration in a single segment, it depends solely on a demand recovery in furniture and home improvement purchases, which is highly uncertain in our view given the weak macroeconomic backdrop. In January and February 2020, national retail sales fell by 21% and furniture sales declined by 33.5%, compared with same period in 2019.
Easyhome's malls were forced to close for roughly a month. We expect the voluntary one-month rental concession offered to tenants presents a direct hit of Chinese renminbi (RMB) 500 million to RMB600 million, or about 8% of its full-year rental income. In addition, any negative rental reversions could exacerbate the adverse impact, given the bulk of lease agreements will come due in the second and third quarters.
Easyhome's sublet business model leans toward an asset-light approach. We believe the company's effort in negotiating rental concessions from its landlords could provide some cushion, although its own lease obligations could still weigh on leverage, in our view.
The company's efforts to persuade tenants to prepay rents and renew leases early by offering rent concessions could also partially offset the impact. Most recently, renewed leases have not seen significant negative reversions while tenant retention rates have remained high, according to the company.
In our base case, Easyhome's debt-to-EBITDA ratio will rise to about 6.7x in 2020 and decline slightly in 2021. But this depends on the magnitude of a recovery and proactive measures to control its capital expenditure (capex) to manage its leverage ratios.
In our view, the dampened cash inflow from rent concessions will reduce the buffer of its liquidity. That said, we don't expect the company to have significant refinancing risks, due to its funding access and about RMB10 billion in unencumbered assets. We continue to assess the company's liquidity as adequate.
The negative outlook reflects our view that Easyhome's cash flows from its home improvement and furnishing retail malls may not rebound sufficiently to offset the short-term impact from the recent closures caused by the outbreak and the resultant slowdown in domestic consumption in the next 12 months.
We could downgrade Easyhome if the company's cash flow significantly weakens, such that the adjusted debt-to-EBIDA ratio fails to recover to about 6.0x, or EBITDA interest coverage falls short of 2.0x. This could happen if the occupancy or rental reversions cause rental income to drop more materially than our base-case expectations.
We could also downgrade the company if its liquidity profile deteriorates due to income loss and its high short-term maturities, such that liquidity sources to uses falls below 1.2x.
We could revise the outlook to stable if Easyhome improves its leverage and cash flow adequacy measures such that its adjusted debt-to-EBIDA ratio is sustainably below 6.0x, and EBITDA interest coverage above 2.0x. This could happen if the company quickly rebounds from the disruption to its business operations by achieving solid rental income and controlling its financial leverage.
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