Hong Kong-based supply chain and management company Li & Fung was downgraded to BB+ from BBB- with a stable outlook by S&P due to weakening business strength post the sale of its logistics unit in December 2021. The rating agency expects that the asset sale will shrink Li & Fung’s EBITDA base and lower its growth potential. They pointed out that while it could also increase cash flow volatility, it will also strengthen certain credit measures including improving its debt leverage. However, they do not expect it to fully offset the negative impact. Li & Fung is now concentrating on its trading business with the company expecting a 26% revenue growth in 1H 2022. Trading businesses’ value proposition to Li & Fung’s clients is rising, and inflation is also aiding prospects as clients want a broader network of sourcing alternatives to take advantage of cost differentials and reduce any shock to consumers. S&P estimates that the company will use its net sales proceeds to cut its debt and the remaining will be given as dividend to shareholders. Post offloading the logistics business, the company’s lease obligations will reduce significantly.
Li & Fung’s USD 4.375% 2024s traded lower by 4.68 points to 88.03 to yield 10.98%.