Fitch Ratings has affirmed
Fitch has also affirmed the rating on Pan Brothers'
The affirmation reflects the liquidity pressure from
'CCC' National Ratings denote a very high level of default risk relative to other issuers or obligations in the same country or monetary union.
Key Rating Drivers
Imminent Debt Maturity: Pan Brothers faces a
Negative Cash Flow from Operations: We expect cash flow from operations to remain negative in 2023 (1Q23: negative
Limited Financial Flexibility: We estimate that available cash and internal cash flow generation, excluding the
Flat Revenue Growth: We expect revenue growth to stay flat in 2023, as the company's ability to invest in capacity expansion is limited. The steady revenue forecast is supported by our expectations of improved sales for the remainder of 2023, despite a weak 1Q23 amid low customer demand. We also expect the EBITDA margin to decline to below the 8% level in 2023 due to rising wage pressure.
ESG - Management Strategy: Improvement in its cash generation is dependent on Pan Brothers' strategy development and implementation in terms of working-capital and debt maturity management. Its debt repayment and refinancing capacity relies on its ability to attract new bank lenders beyond its previous and current lenders, or other alternative sources of funding.
Derivation Summary
Pan Brothers' rating is driven by near-term liquidity pressure, with the maturity of a
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Flat revenue growth in 2023, followed by low single-digit growth in 2024
EBITDA margin of below 8% in 2023, before recovering to around 8% in 2024
Capex of around
No dividend in 2023-2024
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Pan Brothers would be reorganised as a going-concern in bankruptcy rather than liquidated. We assume a 10% administrative claim.
Going-Concern Approach
The going-concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the enterprise valuation.
We estimate EBITDA at
An enterprise value multiple of 5x EBITDA is applied to the going-concern EBITDA to calculate a post-reorganisation enterprise value. The multiple factors in Pan Brothers' customer quality and stable demand, despite Covid-19 pandemic-related disruption. The multiple also applies a discount from the median of around 8x of comparable Asian apparel peers, which are generally larger than Pan Brothers.
The going-concern enterprise value corresponds to a 'RR3' Recovery Rating for the senior unsecured notes after adjusting for administrative claims. Nevertheless, Fitch has rated the senior unsecured bonds at 'CCC-' with a Recovery Rating of 'RR4' because, under our Country-Specific Treatment of Recovery Ratings Criteria,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improved liquidity that includes continued access to bank funding
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Inability to refinance the upcoming syndicated loans by the end of 3Q23
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Insufficient Liquidity: Pan Brothers had
Issuer Profile
Pan Brothers is one of
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Pan Brothers has an ESG Relevance Score of '5' for Management Strategy, due to the impact of its strategy development and implementation in terms of working-capital management and funding, which has a negative impact on the credit profile, and is highly relevant to the rating, resulting in the weak liquidity position and high refinancing risk that underpins the rating.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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