Fitch Ratings has affirmed Vietnam-based Hoang Anh Gia Lai JSC's (HOSE: HAG) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with Stable Outlooks. Simultaneously, Fitch has assigned a 'B' senior unsecured rating to HAGL, as well as an expected 'B(EXP)' rating and a Recovery Rating of 'RR4' to its proposed USD notes, which are guaranteed by HAGL's main operating subsidiaries. The final rating of the notes is contingent upon the receipt of documents conforming to information already received.

The rationale for HAGL's ratings remains unchanged from that detailed in Fitch's press release entitled "Fitch Rates Vietnam's Hoang Anh Gia Lai at 'B'; Outlook Stable" dated 9 February 2011 and summarised below. HAGL's ratings are constrained by its large capex plans of over USD400m until the end of 2013. Also, the company plans to diversify away from its established, but volatile, residential property development business in Vietnam into hydropower generation, iron ore mining and rubber plantations in Vietnam, Cambodia and Laos, which would increase execution risks. This concern is heightened by HAGL's high funding costs, a reflection of Vietnam's current high interest rate environment.
A successful completion of the proposed USD Notes will help lower funding costs while improving debt its maturity profile. HAGL also maintains high cash balances and undrawn committed facilities to manage liquidity risks. There is also significant flexibility in its capex plans to reduce, delay and/or cancel projects as they are modular.
HAGL's ratings are also supported by its established residential property development business, which focuses on the mid-tier market in Ho Chi Minh City. The company has a sufficient land bank for proposed projects over the next five years. This land was acquired at materially lower costs than current market value, which in addition to the reliance on in-house construction, allows for high profit margins.
The Stable Outlook reflects Fitch's expectation that cash flows from property development would be sufficient to cover funding costs during HAGL's expansion phase up till the end 2013. The agency expects the company's funds from operations (FFO) interest coverage to range between 2x-3x during this period.
Negative rating actions could be taken if the company's FFO interest coverage is sustained below 2x and/or if it does not scale back its capex without securing longer term lower cost funding. A positive rating action is not envisaged until the new ventures contribute to at least half of total operating profits and generate sufficient FFO to sustainably provide 2.5x coverage of interest.