Standard and Poor’s Affirms Ratings On Various Austrian Banks Following Resolution Of CreditWatch On Austria

Standard & Poor’s Ratings Services said today that it had lowered its long-term corporate credit rating on Vietnam-based property developer Hoang Anh Gia Lai Joint Stock Co. (HAGL) to ‘B-‘ from ‘B’. The outlook is negative. We also lowered the issue rating on the company’s senior

notes to ‘B-‘ from ‘B’. At the same time, we lowered the ASEAN regional scale rating on HAGL to ‘axB-‘ from ‘axBB-‘. We removed all the ratings from CreditWatch, where they were placed with negative implications on Aug. 30, 2011.

“The rating downgrade reflects our view that HAGL’s operating performance and liquidity are likely to remain weak in the next six to 12 months,” said Standard & Poor’s credit analyst Weekhim Loy. “This is due to the challenging operating conditions for the company’s residential property development business. A delay in obtaining approvals to start iron ore mining in Laos and Cambodia has exacerbated the situation for HAGL.”

Given our view that liquidity is weak, based on our criteria, the rating on HAGL will be no higher than ‘B-‘. In addition, HAGL’s plan to diversify into rubber plantations and hydropower businesses requires significant capital expenditure and poses heightened execution risk.

We expect HAGL’s property sales to remain depressed in 2012 due to persistent high inflation and high interest rates in Vietnam, and the devaluation of the Vietnamese dong (VND),” said Ms. Loy. “We do not expect HAGL’s Laos and Cambodia mines to generate cash flows in 2012.

A ramp-up in the iron ore production from mines in Vietnam and the commissioning of new hydropower projects will only modestly offset the decline in property sales, in our view.”

We estimate HAGL’s capital expenditure for 2012 at about VND3 trillion (US$142 million), of which we believe VND1 trillion is committed for investment in rubber plantations. We assume that the rest of the capital expenditure (pertaining to hydropower stations and mining ore operations) is discretionary and can be deferred until HAGL’s liquidity strengthens through improved property sales.

We believe HAGL would be able to service its interest burden of VND600 billion, including US$8.9 million interest on the US$90 million senior notes. We assume the company’s total borrowings will be unchanged as it carries out only committed capital expenditure and reduces operating expenses to preserve cash flows. We expect EBITDA interest coverage to deteriorate to 2.0x-2.5x in fiscal 2012. For the 12 months ended Sept. 30, 2011, HAGL’s consolidated EBITDA interest cover was 3.3x.

As of Sept. 30, 2011, HAGL has not met the incurrence covenant of fixed charge coverage ratio of at least 3.5x (defined as the ratio of consolidated EBITDA to interest expense) stipulated in the US$90 million bond documents. We believe HAGL is unlikely to meet this covenant in 2012 due to the weak outlook for the property sector in Vietnam and the company’s reduced iron ore production.

HAGL has undrawn credit facilities of about US$68 million (VND1.4 trillion) provided by various banks. In our view, HAGL has limited flexibility to draw on these credit facilities for working capital purposes as they are mostly project-related loans. “The negative outlook on HAGL reflects our view that the company’s liquidity is likely to continue to be weak,” said Ms. Loy. Our view is based on our expectation that HAGL’s apartment sales will remain depressed. Moreover, the company’s committed capital expenditure is large, and it has limited flexibility in its bond covenant to increase borrowings. The improvement in its liquidity is reliant on less certain sources of funds such as asset sales.

We may lower the rating if HAGL’s liquidity deteriorates further. This could happen if the sale of iron ore or electricity is hit by weak demand, or the company’s capital expenditure is more aggressive than we expected, particularly for investments in rubber plantations. We expect cash flows from these investments to materialize only in 2014 and beyond.

We may revise the outlook to stable if HAGL’s liquidity stabilizes and the company reduces its leverage. This could happen if HAGL raises significant capital from asset sales, improves property sales, or ramps up its iron ore production and electricity sale.



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