S&P revises Li & Fung outlook to negative on planned logistics divestment

HONG KONG - Ratings agency Standard and Poor's has downgraded Hong Kong major Li & Fung, saying its planned sale of LF Logistics is negative to the business strength of the global supply chain manager. The logistics arm of Li & Fung was likely to account for 50%-60% of full year EBITDA in 2022, S&P said.

Downgrading Li & Fung's outlook to negative, S&P said the transaction, which is subject to various regulatory approvals, would provide a financial cushion to Li & Fung and give the company more flexibility to deploy capital to its trading business.

"But this comes at the expense of it losing an important growth driver and the diversification benefits of owning a logistics business," S&P said.

S&P Global Ratings revised its outlook on Li & Fung to negative from stable and affirmed the 'BBB-' long-term issuer credit rating on the company.

It said the negative outlook reflected the potential effect of the LF Logistics divestment on Li & Fung's business strength, given reduced scale and diversification.

"While the trading business is seeing more stability, it is unlikely to replace the growth potential of logistics for some time," S&P said.

LF Logistics had been the main growth driver for Li & Fung, with it set to contribute 55%-60% of Li & Fung's EBITDA in 2021 and 2022.

A.P. Moller-Maersk's planned acquisition of 100% of LF Logistics would likely remove more than half of Li & Fung's EBITDA base, S&P said.

After the transaction closed, Li & Fung would be entirely dependent on its traditional trading business (which had been volatile but showed signs of stabilising in the first half of 2021) with a reduced EBITDA base to weather shifting external conditions.

S&P said it expected the transaction to close most likely in the second half of 2022, with Li & Fung to receive US$2 billion-US$2.5 billion in cash proceeds based on the deal value of US$3.6 billion. Li & Fung owns a 78.3% interest in LF Logistics.

www.standardandpoors.com (ATI).