S&P: Hua Han Health Industry Holdings Ltd. Downgraded To 'B+' On Weakened Risk Management; Ratings Remain On Watch Negative
"We downgraded Hua Han because we believe the company's risk management has weakened and we see higher risk in its internal control," said S&P Global Ratings credit analyst Sophie Lin.
On Sept. 27, 2016, Hua Han suspended trading in its shares and debt securities pending an announcement of the audit progress of its annual results for the fiscal year ended June 30, 2016.
We believe Hua Han could delay filing its annual results due to the expanded audit scope on financial reporting and internal control. Moreover, the company's response to allegations of accounting irregularity is slower than we expected and management's communication with us has not been timely and transparent. This indicates Hua Han's deficiencies in managing the potential negative implications of the allegations and increasing risk of information quality. As a result, we have revised our assessment of the company's management and governance to weak from fair.
We are unclear when Hua Han will resume share trading. Suspension of trading in shares for several consecutive trading days could trigger an event-of-default clause under the company's convertible bonds covenant, which may lead to accelerated repayment of debt. We understand the company is seeking wavier from bondholders.
Based on its cash position as of Dec. 31, 2015, Hua Han should have sufficient resources to meet the potential early redemption of its Hong Kong dollar (HK$) 620 million convertible bonds and its US$150 million senior unsecured notes. However, this information may be dated, given the company's high capital spending for its hospital business. We also need to assess management's willingness and ability to timely repay its debt maturities in case of an accelerated repayment.
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.
The validity of the allegations is still unclear to us and the delay in filing the annual report could reduce the timeliness and transparency of the company's financial reporting and position. We see uncertainties on how Hua Han's creditors, the auditor, and the regulators will respond to the allegations and the delay in the filing of annual results. The securities regulations required the company to file its preliminary annual financial results within three months of its fiscal year end. Any negative response or investigation could weaken the company's liquidity, the confidence of its counterparties, and weigh on its operational and financial performance. As a result, we kept our ratings on Hua Han and its notes on CreditWatch with negative implications. The company's compliance with relevant accounting standards and the severity of its internal control deficiencies will continue to 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 allegation of accounting irregularities and the impact of the negative report on Hua Han's credit profile.
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 due to a failure to obtain waiver from bondholders, materially reduced access to capital markets, or deterioration in operating performance; or (3) there is an extended delay in the filing of the annual report.
We could affirm the rating if Hua Han proves its appropriate application of the accounting standards, resumes trading in its shares and debt securities, and files its annual report with unqualified auditor's opinion on time, while maintaining an adequate liquidity position.