#BBB+# Rating On AEON Mall Co. Ltd. Affirmed After Those On Parent Outlook Remains Negative

Stocks and Financial Services Press Releases Friday June 23, 2017 17:40
TOKYO--23 Jun--S&P Global Ratings

TOKYO (S&P Global Ratings) June 23, 2017--S&P Global Ratings today said that it has affirmed its 'BBB+' long-term corporate credit rating on Japan-based shopping mall operator AEON Mall Co. Ltd. The outlook remains negative.

The affirmation results from a rating review of the company as a consequence of affirming our ratings on its parent company, Japan-based retailer AEON Co. Ltd. (BBB+/Negative/--); we regard AEON Mall as highly integral to the AEON group.

AEON Mall has established a strong position in shopping center development and management, with an excellent ability to develop and manage shopping malls together with AEON group's high brand recognition. In addition, the company holds and manages a high-quality property portfolio generating stable rental income. We expect the company's profitability to moderately recover as new store openings and renewals both at home and overseas drive high earnings growth and its overseas business returns to profit. Accordingly, we continue to assess AEON Mall's business risk profile as strong.

Key financial ratios for AEON Mall remain relatively favorable. Heavy investments have somewhat weakened them in recent years, but we expect greater contributions to profit from its overseas business to fuel their gradual recovery. Therefore, we believe AEON Mall can maintain a financial risk profile we assess as modest. We have not drastically changed our base-case scenario for AEON Mall.

We view AEON Mall's liquidity as adequate. We expect its liquidity sources to exceed more than 1.2x uses in the next year. Its liquidity sources would likely exceed uses even if EBITDA declined 10%, in our view. The company has continuous access to capital markets through corporate bond issuance and strong relationships with financial institutions.

We continue to assign to AEON Mall an 'a-' stand-alone credit profile (SACP), which incorporates its business risk profile, financial risk profile, and modifiers. It also excludes the likelihood of extraordinary support from the parent group. This SACP exceeds the 'bbb+' group credit profile (GCP) for AEON group. We regard AEON Mall as a highly strategic subsidiary of AEON group because we believe the company's business is highly integral to the group's strategy and operations. In general, we believe the rating on a highly strategic subsidiary can't exceed the GCP even when the SACP for the subsidiary exceeds the GCP for the parent group.

The outlook on our long-term rating on AEON Mall is negative. The negative outlook reflects that on its parent, AEON Co. Ltd. We expect AEON Mall to maintain a strong financial base thanks to continued stable rental income from high-quality properties, underpinned by excellent ability to develop and manage shopping malls plus AEON group's brand recognition.

We may consider lowering the rating on AEON Mall if we lower the GCP for AEON group. In a downgrade scenario, AEON would relax its fiscal discipline, thereby increasing investment and reliance on debt, and we would expect its debt to EBITDA (excluding its financial services business) to stay above 4x in the 12 to 18 months or so that followed. We would also consider a downgrade if we saw a lower likelihood of future improvement in the profitability of its

GMS business, which requires high capital investments despite   ongoing restructuring. In addition, we would downgrade AEON Mall if its SACP were to fall below the GCP for AEON group as aggressive investments weakened AEON Mall's financial standing. However, AEON Mall's solid and stable business characteristics produce a low likelihood of the latter scenario for the foreseeable future.

Conversely, while the SACP for AEON Mall equals or exceeds the GCP for AEON group, we would revise to stable the outlook on our rating on AEON Mall if we were to revise to stable the outlook on our rating on AEON. We may consider revising the outlook on AEON to stable if we see a higher likelihood it will steadily improve its financial standing. This would be the case if its debt to EBITDA were to fall below 4x and continue to ease on a sustained basis as profits in AEON's retail business recovered in full while it appropriately managed investment and debt levels.

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