Aeon Co. Ltd.

The negative outlook on Aeon reflects our view that, despite its enhanced financial discipline, there is an at least one-in-three chance of its financial standing failing to recover to levels commensurate with the current rating within one or two years due to the lingering impact of the pandemic. We could downgrade Aeon if we see a heightened likelihood of the following scenario: Aeon's debt to EBITDA (on a consolidated basis after adjustment by S&P Global Ratings, unless otherwise noted), will rise and remain above 4.5x. This could occur if the company's EBITDA does not sufficiently recover amid a prolonged pandemic or other factors. We could revise the outlook to stable if we see a stronger likelihood of the company's debt

...We believe there is more than a one-in-three chance that Aeon Co. Ltd.'s cash flow ratios will not improve to levels commensurate with the rating in the next one to two years due to a delayed recovery in EBITDA. Amid increased vaccination rates in Japan, we think that the company faces the prospect of operating its domestic business on the premise of coexistence with COVID-19; the company generates most of its EBITDA in its home market. Temporary store closures and other measures to control the spread of the virus will be lifted gradually. Such measures have depressed the company's EBITDA substantially in the past year. We take the conservative view that the retailer's EBITDA and cash flow ratios might not recover at the pace we assume. This could occur if the impact of COVID-19 worsens again, or if Aeon's competitiveness weakens due to structural changes in consumer behavior, including smaller buying areas or the growth of online shopping. Diversified business formats in its mainstay retail...

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