Standard & Poor’s Ratings Services (S&P) lowered its long-term corporate credit rating on Golden Eagle Retail Group to ‘BB-‘ from ‘BB+’. The outlook is stable.

S&P also lowered its long-term issue rating on the company’s senior unsecured notes to ‘B+’ from ‘BB’. At the same time, it lowered its long-term Greater China regional scale rating on the China-based department store operator to ‘cnBB+’ from ‘cnBBB’ and on the notes to ‘cnBB’ from ‘cnBBB-‘. S&P removed all the ratings from CreditWatch, where they were placed with negative implications on November 10, 2015.

“We lowered the rating because we expect Golden Eagle’s leverage to materially increase post the company’s acquisition of several companies mainly involved in the operation of department stores/shopping malls and property development projects,” said S&P’s credit analyst Shalynn Teo. “We do not anticipate any material reduction in leverage over the next 12 months.”

S&P expects earnings contribution from the target companies and net cash flows from the development and sale of properties to be limited in the next 12 months. Moreover, the target companies have significant debt and construction costs. S&P expects Golden Eagle’s debt-to-EBITDA ratio to increase to more than 4.0x post the acquisitions, from 1.7x in 2014.

Golden Eagle announced its acquisition of Nantong Global Era Real Estate
Development, Nantong Global Era Enterprises and Wuhu Global Era Enterprises for a cash consideration of RMB100 million ($15.5 million) on November 4, 2015. The shareholders approved the acquisitions on December 29, 2015.

S&P expects rising competition and weak consumer demand to weigh on sales at Golden Eagle’s department stores in the next 12 months. However, S&P expects Golden Eagle to keep its EBITDA margin above 40%, helped by rising sales contribution from new stores and the company’s efforts to improve operating efficiency and cost control. S&P anticipates that Golden Eagle’s profitability and cash flows will stabilize over the next 12 to 24 months with slower expansion. However, these metrics could deteriorate if the operating conditions become tougher or the company’s operating expenses increase more than we expect because of the opening of new stores.