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Fitch Affirms Swire Pacific at 'A-'; Outlook Stable
May 19, 2017 / 5:18 AM / 7 months ago

Fitch Affirms Swire Pacific at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, May 19 (Fitch) Fitch Ratings has affirmed Hong Kong-based Swire Pacific Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook. Fitch has also affirmed Swire Pacific's foreign-currency senior unsecured rating at 'A-'. A full list of rating actions is at the end of this commentary. The affirmation reflects the mixed performance of its subsidiaries, including the stable rental income of Swire Properties Limited (A/Stable), and weak profitability at its aviation and marine-services divisions. The company will increase its capex for investment properties and acquisition costs for the beverage division in 2017, which will lead to a higher leverage ratio and a lower investment-property EBITDA interest coverage ratio. Fitch expects Swire Pacific's credit metrics to improve after 2017 as capex reduces and recurring income rises following the expansion of the beverage division and its investment property portfolio in the medium term. KEY RATING DRIVERS Stable Rental Income: Swire Properties, which is 82% owned by Swire Pacific, provides stable and predictable rental income to the parent. Gross rental income from its investment properties rose 0.5% in 2016, which resulted in a strong investment property EBITDA 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 the retail rental income. Swire Properties has a well-established Grade A office portfolio in Hong Kong with a 99% occupancy rate in 2016. The company 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. Weak Performance of Cathay Pacific: Swire Pacific's 45%-owned associate, Cathay Pacific group, had an attributable loss of HKD259 million in 2016, compared with a profit of HKD2.7 billion in 2015, due to strong competition in the aviation industry, which put intense downward pressure on passenger yield. Premium class demand also deteriorated. The performance of the sector may remain weak in 2017 in view of the continuing lacklustre demand for premium class travel, strong competition and the strong US dollar. Corporate transformation with the intention to be more competitive in both cost and service quality, and gradual exit from the fuel hedging strategy may improve profitability in 2018. Expanding Territory for Beverage Franchise: Attributable profit of the beverage division declined 17% to HKD813 million in 2016, driven by weaker profitability in Mainland China. A weaker sales mix and promotional pricing led to lower revenue per unit in the mainland. Profitability in the US, Hong Kong and Taiwan remained stable. Swire Beverages will increase its coverage of China's population to 49% from 31% after the completion of the acquisition of additional territory rights in mid-2017. A better sales mix, new product launches, and stable sales volume growth in China should lead to slightly better profitability for the division in 2017. Reduced Marine-Services Capex: The marine services division's attributable loss widened to HKD3.0 billion in 2016 from HKD1.3 billion in 2015, as low oil prices continued to adversely affect exploration and production activity. The fleet's utilisation rate dropped to 63.4% in 2016 from 74.9% in 2015, after peaking at 90% in 2012. Swire Pacific reduced its capex for this division by 37% to HKD946 million in 2016 amid the weaker demand. The capex commitment for 2017-2019 is HKD2.3 billion, as the oversupply of offshore vessels will continue to pressure on utilisation and daily charter hire rates. Increased Structural Subordination: Swire Properties is relying less on its parent for funding. Its external borrowings accounted for 80% and 68% of the company's total as of end-2016 and end-2015, respectively, compared with 26% at end-2011. This trend increases Swire Pacific's structural subordination to external parties in access to the stable operating cash flows of Swire Properties. DERIVATION SUMMARY The ratings on Swire Pacific are driven by its 82%-owned subsidiary, Swire Properties, which is the biggest contributor to the underlying profit of Swire Pacific. Swire Properties provides stable and predictable rental income to Swire Pacific, which results in sufficient investment-property EBITDA/cash interest coverage. Swire Pacific is rated at one-notch below Swire Properties, due to its structural subordination to external parties in access to the stable operating cash flows of Swire Properties. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Swire Properties' total rental income growth at 2%, 2% and 4% in 2017, 2018 and 2019, respectively - Total revenue growth rates of 35% in 2017, 0% in 2018 and 8% in 2019 - EBITDA growth rates of 28% in 2017, 9% in 2018 and 8% in 2019 - Capex (including equity investment in JV companies and acquisitions) to peak at HKD22 billion-24 billion in 2017, declining to HKD5 billion-7 billion a year in 2018-2019 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - No positive rating action is envisaged over the next 18-24 months until the company's financial metrics improve to the levels of similarly rated peers. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Material decline of Swire Pacific's shareholding in Swire Properties - Negative rating action on Swire Properties - Swire Pacific's future capex causes a sustained deterioration in its credit metrics relative to those of Swire Properties LIQUIDITY Ample Liquidity: Swire Pacific had HKD6.5 billion in cash and HKD23.7 billion in committed undrawn facilities at end-2016, more than enough to cover its short-term debt of HKD8.3 billion. None of its debts is secured, which gives it flexibility in financing options. Swire Pacific has a spread-out debt maturity profile with less than 25% of debts falling due in the next two years. FULL LIST OF RATING ACTIONS Swire Pacific Limited -- Long-Term Foreign-Currency Issuer Default Rating affirmed at 'A-'; Outlook Stable -- Senior unsecured rating affirmed at 'A-' -- Rating on Swire Pacific's MTN programme affirmed at 'A-' -- Rating on issues from Swire Pacific MTN Financing Limited affirmed at 'A-' -- Swire Pacific Limited's USD500 million 5.5% notes due August 2019 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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