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HONG KONG — Two credit rating agencies turned negative toward SF Holding on Thursday after China’s largest parcel delivery service company by volume said it would spend over $2 billion to take control of a Hong Kong-based logistics operator.
S&P Global Ratings and Fitch Ratings switched their view on SF’s credit outlook to “negative” from “neutral” after SF said it would acquire a 51.8% stake in Kerry Logistics Network for 17.55 billion Hong Kong dollars ($2.26 billion).
The decision means all three major rating agencies, including Moody’s Investors Service, have negative outlook for SF, meaning the rating is closer to “downgrade” than “upgrade.” All three now rate SF at the same level of “A-minus” or “A3”.
Shenzhen-listed SF’s deal with Kerry is expected to help it expand in Asia, where many of SF’s mainland Chinese clients are expanding.
Jeffrey Chan, SF’s chief strategy officer, said on Wednesday that the company intended to fund the Kerry deal through a loan.
According to Moody’s estimate, this will bring the Chinese company’s leverage ratio — measured by the ratio of its adjusted debt to its earnings before interest, taxes, depreciation and amortization — to rise to around 3 times in the next 12 to 18 months, from 2.3 for the 12 months until the end of September.
“Such a level of leverage is high for its rating, underpinning the negative outlook,” said Lina Choi, analyst at Moody’s, in a report published on Thursday, despite SF’s relatively strong cash generating capabilities. SF had cash and cash equivalents of 13.09 billion yuan ($2.03 billion) at the end of September.
“The negative outlook reflects that the debt-funded tender offer, if it materializes, will weaken SF’s strong cash buffer and delay its deleveraging by 12 to 18 months, given the large size of the transaction,” Choi said.
The views partly depend on whether SF can secure alternative funding. The company said on Wednesday it planned to issue up to 22 billion yuan of A-shares in a private placement, establish a real estate investment trust, or REIT, and apply for a listing in Hong Kong.
The REIT, which consists of properties in Hong Kong, Foshan in Guangdong Province, and Wuhu in Anhui Province, has an appraised value of about HK$6.1 billion, according to S&P.
“These equity fundraising initiatives track our earlier expectation that SF will explore non-debt financing options to manage debt leverage amid its focus on growth,” wrote Clifford Kurz at S&P. If the equity financing materializes, it said it would lift the negative credit watch.
While concerns mount among credit agencies, equity analysts are turning bullish on the outlook for SF, which already has the largest cargo freighter fleet in China.
Frank Yip at Daiwa Capital Markets in Hong Kong raised his stock ratings on SF by two notches to “buy,” writing that the deal is “fast-tracking to enter international markets with synergies in China” for SF. He raised the target price for SF shares to 140 yuan, 20% higher than the closing price of 117.1 yuan on Wednesday.
Rong Li, a Hong Kong-based analyst at CCB International Securities, said the deal had the “makings of a global logistics giant” and that the business footprints of the two companies were “highly complementary.” His target price was raised to 131 yuan, almost doubling from 72.2 yuan.
According to QUICK-FactSet database, all 22 analysts who provide stock price ratings either gave a positive “buy” or “outperform” rating for SF as of Thursday evening. Equity analysts tend to pay more attention to what acquisitions mean for a company’s growth prospects, while credit analysts care more about how deals are funded.