Supply-chain company Li & Fung and its senior unsecured bonds were downgraded to BBB- from BBB by S&P while its perps were downgraded to BB from BB+. The outlook was stable. With shrinking EBITDA and lower cash balances, S&P expects leverage to be high – its gross debt remained largely unchanged at $1.4bn, with cash of ~$565mn and its debt-to-EBITDA above 3x. S&P noted that provisioning of receivables will weigh on Li & Fung’s capital base. Due to the pandemic leading to a reduced likelihood of collection, the company made a provision for overdue receivables and indicated it would seek the recovery of these receivables – S&P does not see any recoverable amount in their base case. On the positive side, S&P expects them to generate positive and growing cash flow from operations from its stabilizing trading business and expanding logistics segment, as well as ongoing working capital management. These should more than cover the company’s capex and dividend distribution. S&P also expects that the company will stabilize its core trading business, grow its high margin logistics business and maintain a conservative liability profile.
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