S&P: Hua Han Health Industry Holdings Ltd. Ratings Placed On CreditWatch Negative On Uncertain Impact Of Recent Allegations
"We placed the ratings on CreditWatch following Hua Han's slower response than we expected to allegations of overstatement of its revenue, profits, and cash balance, in a research report published on Aug. 10, 2016," said S&P Global Ratings credit analyst Sophie Lin.
Hua Han is yet to provide a clarification on the report and has suspended trading in its shares and debt securities since Aug. 11, 2016. We believe the delay in Hua Han's response may weaken confidence in the company's ability to manage the potential negative implications of the allegations.
While the validity of the allegations is still unclear to us, we see uncertainties on how Hua Han's creditors, auditor, and the regulators will respond to the event. Any negative response or extended investigation could weaken the company's liquidity and weigh on its operational and financial performance.
At the time of the writing, it is unclear to us as to when Hua Han will resume trading in its shares and debt. Suspension of trading in shares for several consecutive trading days could trigger an event-of-default clause under the company's convertible bond, which may lead to accelerated repayment of debt. We understand the company is seeking wavier from bondholders.
We believe Hua Han has sufficient resources to meet the potential early redemption of the Hong Kong dollar (HK$) 620 million convertible bond. It also has sufficient cash to repay its US$150 million senior unsecured notes. However, we need to assess management's willingness and ability to timely repay its debt maturities in case of accelerated repayment needs. Hua Han has about HK$4.0 billion of cash and cash equivalent as of Dec. 31, 2015, partly from its HK$3.1 billion share offering in June 2015.
We will reassess Hua Han's internal controls and the reliability of its financial reporting once we have more information to verify the company's compliance with relevant accounting standards. The timeliness and quality of management's response to the negative research report, and the outcome of a potential scrutiny by Hua Han's auditor and the regulators will underpin our assessment.
"We aim to resolve the CreditWatch within the next three months when we have more information to assess the validity of the research report and its impact on Hua Han's credit profile," said Ms. Lin.
We could lower our rating on Hua Han by one or more notches if: (1) any of the allegations prove to be true; (2) the company's liquidity deteriorates substantially; or (3) there are deficiencies in its governance and internal control process.
We could affirm the rating if Hua Han responds to the negative research report with solid evidence to prove its appropriate application of the accounting standards, resumes trading in its shares and debt securities, files its annual report with unqualified auditor's opinion on time, and maintains adequate liquidity.