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Fitch Assigns Taipei 101 First-Time 'AA-(twn)' Rating; Outlook Stable
November 2, 2017 / 5:49 AM / 21 days ago

Fitch Assigns Taipei 101 First-Time 'AA-(twn)' Rating; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 02 (Fitch) Fitch Ratings has assigned Taipei Financial Center Corporation (Taipei 101) a first-time National Long-Term Rating of 'AA-(twn)' with a Stable Outlook and a National Short-Term Rating of 'F1+(twn)'. The agency has simultaneously assigned Taipei 101 a senior unsecured rating of 'AA-(twn)'. The ratings of Taipei 101, which owns Taiwan's "Taipei 101" landmark building, are derived from its standalone assessment of 'A+(twn)' with a Stable Outlook and incorporate a one-notch uplift due to its moderate linkage with its ultimate parent, the Taiwan sovereign; in line with Fitch's Parent and Subsidiary Rating Linkage criteria. The linkages include the sovereign's 52.1% indirect ownership of the building, which is also a major tourist attraction, through its non-wholly owned state-owned enterprises. Taiwan's Ministry of Finance also directly appoints the board's chairman and nominates president. This is further reinforced by the government's record of increasing its stake over the past two decades. Taipei 101's standalone credit profile is supported by its leading position among Taipei's grade-A offices and high-end malls. Its flagship asset has low rental risk and stable asset performance. Taipei 101's strong financial profile also supports its ratings. However, the ratings are constrained by single-asset concentration; as its performance is limited by the economic landscape of investment properties in Taipei. KEY RATING DRIVERS Strategic Property Asset: Taipei 101 is the owner of Taiwan's landmark building, popularly known as "Taipei 101", which houses flagship stores of many brands and will remain as an icon of Taiwan. The single-asset property-investment company encompasses offices, a shopping mall and an observatory deck. It is strategically located in the Xinyi District, Taipei's prime business area, and is well connected with other parts of the city through an extensive transportation network. The single asset is valued at TWD77 billion (USD2.6 billion). This compares well with other highly rated smaller Hong Kong and Singapore property investment companies with asset sizes of USD1 billion to USD4 billion. Stable Asset Performance: Taipei 101 has a high occupancy rate of over 90% for its office properties and a sustained record of 100% occupancy for its mall between 2013 and 2016. The stable occupancy and rental rates have kept Taipei 101's EBITDA margin at over 65% for the past four years. The 30% revenue share from its office properties, 40% from retail properties and 30% from tourism earnings provide earnings diversification. Taipei 101 also actively manages its tenant mix to keep single-tenant concentration below 10% of rental income, helping spread out its lease expiration over several years. Strong Financial Profile: Taipei 101's financial profile compares well with the highest-rated international property investment companies rated by Fitch. It had high FFO interest coverage of 12.9x in 2016, but its payable adjusted FFO net leverage was a less robust 4.8x when compared with peers. Taipei 101's financial profile has large headroom and therefore does not compare less favourably against peer Cathay No.2 Real Estate Investment Trust Fund (A(twn)/Stable), which is in a net cash position. Fitch expects Taipei 101's coverage to remain strong due to rising recurring EBITDA generation and continued low-cost borrowings in Taiwan compared with that of most Asian countries. No Notching for Unsecured Debt: Fitch does not notch down Taipei 101's senior unsecured rating even though its only asset has been pledged to existing lenders. Taipei 101's secured debt is overly collateralised, with net debt to investment property value at only 21.7% as of end-2016. The excess value over secured borrowings gives unsecured lenders sufficient protection. Furthermore, we expect the high level of secured debt to fall, as the company plans to refinance its secured debt over the next 12 months with unsecured corporate bonds and commercial paper so that its secured debt/EBITDA ratio falls to around 2.5x in the next 12 months, from 4.2x as of end-2016. DERIVATION SUMMARY Taipei 101's ratings are supported by its prudent financial management and resilient rental income from its investment property in Taipei's prime CBD area. However, the ratings are constraint by its small-scale single-asset property. Taipei 101's standalone rating is the same as that of Advanced Semiconductor Engineering, Inc.'s (A+(twn)/Rating Watch Negative), a leading player in Taiwan's outsourced semiconductor assembly and testing industry (OSAT). Taiwan 101 is much smaller by EBITDA, but its property investment business has a stable recurring cash flow. The OSAT industry, in contrast, is likely to face soft market fundamentals, high competition, debt-funded consolidation and large investment requirements. Taipei 101's standalone rating is one notch higher than that of Cathay No.2, reflecting its larger scale, as Cathay No.2 only generated EBITDA of USD12 million on an asset value of USD460 million in 2016. This compares against Taipei 101's EBITDA of USD135 million from USD2.6 billion in assets. Taipei 101's location and building quality is also better than that of Cathay No.2. However, Cathay No.2 has not incurred any debt since inception and its net-cash position strongly supports its ratings. Taipei 101's investment property interest coverage of 12.8x in 2016 is higher than that of most Fitch-rated Hong Kong landlords in the 'A' category on the international scale, which have coverage from 1.8x to 7.2x, and Singapore REITs in the 'BBB' category, whose coverage ranges from 5.5x-8.0x. Its coverage ratio is only lower than the 15.0x-16.0x of Hysan Development Company Limited (BBB+/stable). Taipei 101's net leverage of 4.6x as of end-2016 is slightly higher than that of 'A' rated international peers, Hysan and Cathay No.2, but lower than the 5.0x-7.0x of 'BBB' Singaporean REITs KEY ASSUMPTIONS - Office occupancy rate of 97% (95% effective rate on rental collected) and 2% annual rental reversion growth - Total mall retail selling proceeds increasing by 2% per year with an estimated rental income of 15% of total retail sales - Tourist visits and Taipei 101's tourist-deck ticket-price inflation at 3% per year - Stable 2017-2018 land lease payment from 2016, increasing by 20% in 2019-2021 - Dividend payout of 90% RATING SENSITIVITIES Fitch does not envisage positive rating action over the next 12-18 months. However, positive rating action could be considered if Taipei 101 can substantially increase scale while maintaining its financial profile or if there is a sign of strengthening linkage between Taipei 101 and its ultimate parent, the Taiwan sovereign. Developments that may, individually or collectively, lead to negative rating action include -Sustained weakening in EBITDA margin below 60% (2016: 69%) -Payables adjusted FFO net leverage above 6.0x (2016: 4.8x) for a sustained period -FFO interest coverage below 5.0x (2016: 12.9x) for a sustained period -Weakening linkage between Taipei 101 and its ultimate parent, the Taiwan sovereign LIQUIDITY Sufficient Liquidity: Taipei 101 had TWD518 million in cash plus highly liquid money-market funds as of end-2016. It also has a committed but unused banking facility of TWD2.5 billion against zero short-term debt. The company plans to issue corporate bonds to lock-in the current low rate. Bond proceeds will be used to repay its syndicate loan to optimise the company's debt structure. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 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. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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