GLP And GLP China Placed On CreditWatch Negative On Proposed Li & Fung Acquisition

  • GLP Pte. Ltd. and GLP China Holdings Ltd., global logistic warehouse operators and investors, have made a proposal along with the Fung family, to acquire and privatize Li & Fung Ltd. by way of a scheme of arrangement. Upon completion of the scheme, GLP will hold 67.67% of the total shares of Li & Fung (40% of the voting shares and 100% of the non-voting shares). The transaction will be funded through external debt and the internal resources of GLP.
  • We believe GLP's recent debt-funded acquisitions amid the COVID-19 pandemic increases the uncertainty of its development earnings and cash flow, as its asset recycling plans may be delayed.
  • On March 25, 2020, S&P Global Ratings placed our 'BBB' issuer credit rating on GLP Pte. Ltd. and its core subsidiary, GLP China, on CreditWatch with negative implications. At the same time, we placed the 'BBB-' long-term issue rating on the outstanding senior unsecured notes issued by GLP and GLP China on CreditWatch with negative implications.
  • We expect to resolve the CreditWatch after receipt of additional transaction details and further discussions with management regarding its deleveraging plans, asset-recycling timeline, and acquisition strategies.
SINGAPORE (S&P Global Ratings) March 25, 2020--We placed GLP Pte. Ltd. and GLP China Holdings Ltd. on CreditWatch with negative implications because we believe recent debt-funded transactions may strain the firms' credit profiles during the COVID-19 outbreak.
GLP China is a core subsidiary of GLP and our ratings and outlook on the entity reflect those on GLP.
The COVID-19 pandemic reduces the visibility of GLP and GLP China's development earnings and cash flow.   By our estimates, development EBITDA from lumpy assets and sales in stakes of funds will account for up to 40%-50% of GLP's EBITDA in 2020. However, GLP's asset recycling plans may be disrupted by delays in regulatory approval, as well as disruptions to the global economy and volatile financial and capital market conditions triggered by the COVID-19 pandemic.
We believe GLP's funds from operations (FFO) and cash flow could become more volatile if the proposed acquisition of Li & Fung Ltd. is successful, compared with its existing core logistic business, from which it derives stable cash flow from rental and management fee income.   The predictability and visibility of GLP's earnings could be reassessed if volatile earnings and cash flows remain a prominent driver of GLP's and GLP China's FFO.
We believe the recent debt funded acquisitions along with a heightened risk of delays in asset recycling may further strain GLP's credit profile. The entity's credit profile is already pressured by slower than expected debt reduction, stemming from its high capital expenditure and delays in the sale of assets in China.
GLP and GLP China have made a proposal along with the Fung family, to acquire and privatize Li & Fung by way of a scheme of arrangement. The proposed transaction cost of HK$7.22 billion will be funded through external debt and the internal resources of GLP. Upon successful completion, GLP will hold 40% of voting shares and 100% of non-voting shares of Li & Fung, resulting in GLP having an effective economic ownership of 67.67%. The Fung family will hold the remaining 60% of voting shares and have the right to appoint a majority of the board directors.
We expect GLP to quickly recycle the recently acquired European logistics assets, however it is subject to execution risk in the current environment. On March 13, 2020, GLP entered into an agreement to acquire Goodman Group's central and Eastern Europe logistics real estate portfolio, located in Poland, Czech Republic, Slovakia, and Hungary. The transaction is subject to regulatory approval and expected to be part funded by debt.

CreditWatch

The CreditWatch on GLP and GLP China reflect our view that the recent debt funded acquisitions amid the COIVID-19 outbreak will strain the credit profiles of both entities, and may delay their asset recycling and deleveraging. We may lower the ratings by one or more notches if we believe volatile earnings and cash flows are likely to remain a prominent driver of GLP's and GLP China's FFO.
We expect to resolve the CreditWatch after receipt of additional transaction details and further discussions with management regarding its deleveraging plans and asset-recycling timeline.
Incorporated in Singapore, GLP is an investment holding company that owns, manages, develops, and leases logistics facilities globally. The company derives revenues from three main areas: rental income, fund management income, and property development income. GLP's main geographical operating areas include China, Japan, Europe, and Brazil. GLP is owned by five consortium members: HOPU Investment Management Co., Hillhouse Capital Group, Bank of China Group Investment Ltd., China Vanke Co. Ltd., and SMG Eastern Ltd., which is controlled by GLP chief executive Ming Mei.
GLP China owns, manages, and develops logistics facilities. It is the largest logistics space provider in China. GLP owns 66.2% of GLP China.

Li & Fung is a Hong Kong-based multinational company that specializes in end-to-end supply chain management of consumer products for leading retailers and brands worldwide via an extensive global network. The group operates through two segments: services and products. As of the end of 2019, Li & Fung operated an extensive supply-chain network with 16,796 people in more than 230 offices globally, working with a comprehensive network of suppliers and customers in over 50 economies.
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