Fitch Ratings has affirmed Vietnam's largrest privately-run conglomerate Vingroup's long-term foreign- and local-currency Issuer Default Ratings at 'B+', however, the outlook is revised to Negative from Stable.
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The Negative Outlook reflects Vingroup's heightened business risk and Fitch estimated that leverage, defined as net debt/adjusted inventory, is likely to rise to 58% in 2018, before falling to 36% in 2019, due to the US$3.1 billion capex for its expansion into auto manufacturing, of which US$1.4 billion is debt funded, the agency said in a statement on October 10.
Vingroup financed its equity contribution in Vinfast, its auto-manufacturing venture, by selling down its interest in its highly cash-generative property business, following an earlier divestment of its investment-property arm.
Moreover, Vingroup has no expertise and limited experience in the auto-manufacturing segment, increasing execution risk. However the group has hired relevant people from the industry to run the business, mitigating the risk. Continued losses in its retail and hospitality segments also increase the group's business-risk profile, leading Fitch to tighten Vingroup's negative leverage guidance to 45%, from 60%.
The rating affirmation reflects Fitch's expectation that Vingroup's remaining property business will support the period of significant capex, which is likely to be followed by deleveraging in the next two years.
The rating agency expected leverage to fall below 45%, the level where Fitch would consider rating action, by 2020, even under an additional 20% stress scenario to reflect the deleveraging being based on strong presales, an improvement in the retail business and Vingroup's high-churn model.
Fitch also considers the listings of Vinhomes JSC in May 2018 and Vincom Retail in November 2017 - which are 74% and 59%, respectively, owned by Vingroup post IPO - as credit negative, at the listings reduced Vingroup's ownership of the businesses' cash flow and assets, especially as the majority of group debt is located at the Vingroup level.
Fitch has adjusted its approach to calculating leverage to capture Vingroup's decreased ownership in these subsidiaries and the subordination and leakage of associated cash, especially at Vinhomes, which is the group's largest cash generator.
Fitch has deducted net debt at Vinhomes and Vincom Retail from consolidated net debt and adjusted inventory and has assumed that Vingroup will have access to its 74% and 59% share, respectively, of the balance inventory. These adjustments significantly increase Vingroup's leverage. However, in addition to dividends, Vingroup continues to access the subsidiaries' cash flow via intercompany loans or project transfer despite of the recent listing of Vinhomes and Vincom Retail, to support its liquidity needs.
