May 19, 2017 / 5:18 AM / 2 months ago

Fitch Affirms Swire Properties at 'A'; Outlook Stable

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(The following statement was released by the rating agency) HONG KONG, May 19 (Fitch) Fitch Ratings has affirmed Hong Kong-based Swire Properties Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A' with a Stable Outlook. Fitch has also affirmed Swire Properties' foreign-currency senior unsecured rating, and the ratings on the medium-term note programme and issues from Swire Properties MTN Financing Limited at 'A'. The affirmation reflects the delivery of stable rental income from its mature investment property portfolio, which provides strong investment-property EBITDA interest coverage ratios. The company has remained prudent regarding expansion in China, and demonstrated strong execution in boosting rental income in China. Its financial position remains solid, with healthy liquidity. KEY RATING DRIVERS Stable Hong Kong Rentals: Swire Properties' gross rental income from its investment properties rose 0.5% in 2016, which resulted in a strong investment-property EBITDA interest coverage ratio of 6.0x. Gross rental income from Hong Kong remained stable at HKD8.6 billion in 2016 due to the moderate growth in office rents, which almost offset a slight decline in retail rental income. Swire Properties has a well-established Grade A office portfolio with an occupancy rate of 99% in 2016. Swire Properties also repositioned its tenant mix at the Pacific Place Mall by introducing more food and beverages outlets and reducing the floor space for luxury items. Growth via Redevelopment: The redevelopment of the Taikoo Place commercial space into two Grade A office buildings will strengthen Swire Properties' leasing income in the medium to long term. The first new office building will be completed in 2018 and the second will be completed in 2021 or 2022. Redevelopment sites carry lower execution risks, and allow Swire Properties to tap resilient demand for office and other commercial space in existing well-developed areas. Rising Rentals outside Hong Kong: The growth of Swire Properties' attributable gross rental income in China in the near term will be driven by the shopping mall and office towers at its 50% owned HKRI Taikoo Hui in Shanghai. The shopping mall and one of the two office towers of the project were completed in 2016. Swire Properties is prudent in its expansion in China as it only invests in first-tier cities (for example, Guangzhou, Beijing and Shanghai) or second-tier cities with very strong potential (for example, Chengdu). In the USA, Swire Properties' 60.9% owned shopping mall at Brickell City Centre in Miami opened in 2016. Less Reliance on Parent's Funding: Swire Properties will continue to refinance its existing intercompany loans from Swire Pacific Limited (A-/Stable) with external funding sources. Borrowings from Swire Pacific have fallen to 20% of total borrowings at end-2016 from 74% at end-2011. This is neutral for Swire Properties' credit rating because Fitch expects the company's stable rental income streams will support its current credit profile. Adequate Interest Coverage: Fitch expects Swire Properties' recurring interest coverage (investment property EBITDA/gross interest expense) to stay above 4.5x in the next few years, due to additional rental income from newly completed properties. DERIVATION SUMMARY Swire Properties' rating of 'A' is well-positioned relative to peers such as Hongkong Land Holdings Limited (A/Stable) and Sun Hung Kai Properties Limited (SHKP, A/Stable). Its investment property EBITDA scale of about USD1 billion is between that of Hongkong Land (USD0.8 billion) and SHKP (USD1.7 billion). Its leverage, as defined by net debt/ investment property value, at 15%-16% is similar to peers, which are at 10%-20%. Its investment property EBITDA/cash interest coverage of 6x is also similar to the 5x-6x of its peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Total rental income growth at 2%, 2% and 4% in 2017, 2018 and 2019, respectively (2016: 0.5%). - Operating EBITDA margin at 50%, 58% and 56% in 2017, 2018 and 2019, respectively (2016: 55%). - Capex (including equity investment in JV companies) of HKD9 billion-10 billion in 2017, HKD3 billion-4 billion in 2018 and HKD2 billion-3 billion in 2019. (2016: HKD6.5 billion) - Net debt at HKD37 billion-40 billion in 2017-2019. (2016: HKD35.4 billion) RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch does not envisage any positive rating action within the next 12-18 months, until Swire Properties' China investment portfolio reaches a critical mass, which would enable the company to achieve meaningful geographical diversification for its leasing income. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Investment property EBITDA/gross interest expense falls below 4.0x on a sustained basis (2016: 6.0x) - There is an aggressive expansion in China with heightened execution and financial risk - Material weakening of Swire Pacific's non-property business, which may require Swire Properties to increase its support to the group LIQUIDITY Ample Liquidity: Swire Properties had a cash balance of HKD1.7 billion, undrawn committed facilities of HKD8.5 billion and undrawn uncommitted facilities of HKD1.1 billion at end-2016, which is more than sufficient to cover its short-term debt of HKD7.5 billion. None of its debts is secured, which gives it flexibility in financing options. FULL LIST OF RATING ACTIONS Swire Properties Limited -- Long-Term Issuer Default Rating affirmed at 'A'; Stable Outlook -- Senior unsecured rating affirmed at 'A' -- Rating on Swire Properties MTN Financing Limited's MTN programme affirmed at 'A' -- Rating on issues from Swire Properties MTN Financing Limited affirmed at 'A' Contact: Primary Analyst Rebeca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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