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Fitch Places Wharf on Watch Negative on Plan to Spin-Off HK Assets
September 8, 2017 / 10:31 AM / 2 months ago

Fitch Places Wharf on Watch Negative on Plan to Spin-Off HK Assets

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, September 08 (Fitch) Fitch Ratings has placed Wharf (Holdings) Limited's Long-Term Issuer Default Rating (IDR) of 'A-' on Rating Watch Negative (RWN). The senior unsecured rating of 'A-' and ratings on the senior unsecured notes issued by Wharf Finance Limited have also been placed on RWN. The full list of rating actions is at the end of this commentary. The rating actions follow Wharf's proposal to spin off the majority of its Hong Kong investment properties into a separately listed company, Wharf Real Estate Investment Company Limited (Wharf REIC). The operations that remain, should the spin-off be completed, will not warrant an 'A-' rating. KEY RATING DRIVERS Spin-off Includes Flagship Properties: Under the proposed reorganisation, Wharf REIC will hold six premium Hong Kong investment properties, including the Wharf's flagship Harbour City and Times Square shopping malls, if the spin-off is completed. Wharf will then focus on investment properties and development properties in Mainland China, other Hong Kong properties, as well as logistics and hotel management. Wharf proposes to implement the spin-off by way of distribution of new Wharf REIC shares to Wharf shareholders. Smaller Scale, Reduced Earnings: The operations that remain at Wharf once the spin-off is completed will be only around 25% of the original total value of investment properties at end-June 2017and Fitch expects the spin-off to reduce Wharf's 2017 EBITDA by more than 60%. Remaining Operations Weaker: Wharf's 'A-' ratings were largely driven by its strong Hong Kong investment properties and their spin-off means that the remaining operations will not have as strong a business profile. Fitch believes the property business in China has a high risk profile due to frequent policy changes and a rapidly evolving competitive landscape. Shopping mall owners in China also face higher business cyclicality than in Hong Kong as competition is stiffer because of greater supply. Wharf's China business, which is dominated by investment properties, will be its largest business segment and the main driver of its ratings after the spin-off. Net Cash Rating Impact Limited: After the spin-off, Wharf will have a net cash position of HKD25 billion due to a HKD37 billion inter-group promissory note settlement and the HKD10 billion dividend receivable from another subsidiary right after the spin-off. However, Fitch believes this net cash position cannot be sustained for long enough for the company to build up its China investment property portfolio to a scale comparable with companies rated in the high 'BBB', such as China Resources Land Ltd (CRL, BBB+/Stable). Had the spin-off taken place earlier, Wharf would have had HKD79 billion of investment properties at end-June 2017 compared with CRL's HKD106 billion. Fitch will review Wharf's credit profile based on credit factors specific to the Chinese property industry after the spin-off. Watch Resolution After Spin-off: Fitch will resolve the Negative Watch after the completion of the spin-off and expects to downgrade Wharf's ratings by multiple notches. Fitch will reassess Wharf's ratings following the spin-off, taking into consideration Wharf's future business plan in China and its intended capital structure. Fitch may withdraw the ratings if the agency does not have sufficient information to assess the remaining businesses of Wharf after the spin-off. DERIVATION SUMMARY Wharf's 'A-' is well-positioned relative to peers such as Sun Hung Kai Properties Limited (SHKP, A/Stable) and Hysan Development Company (Hysan, BBB+/Stable). Its investment property EBITDA scale of more than USD1.5 billion is smaller than SHKP's USD1.7 billion, but much higher than Hysan's USD0.4 billion. Wharf's leverage, as defined by net debt/ investment property value, at 8% 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. The rating has been placed on Rating Watch Negative due to Wharf's proposed spin-off of its Hong Kong investment properties. Fitch expects Wharf's business as well as financial profile to weaken if the spin-off is completed. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Positive rental reversion of 10% for Hong Kong investment properties in 2017-2018 - China investment properties' EBITDA margin at 50%-60% for 2017-2018 - China property development EBITDA margin to be stable at 13% for 2017-2018 - Capex for investment properties of HKD10 billion-12 billion a year RATING SENSITIVITIES Developments that may, individually or collectively, lead to negative rating action include: - The spin-off and listing of Wharf REIC is completed - The ratings on Wharf may be downgraded by multiple notches because Wharf's credit profile will be reassessed based on its plans for its China businesses and intended capital structure Developments that may, individually or collectively, lead to positive rating action include: The rating is on Rating Watch Negative so positive rating action is unlikely. If the spin-off is not completed, Wharf's rating may be affirmed at 'A-' with Positive Outlook LIQUIDITY Sufficient Liquidity: At end-June 2017, Wharf had cash balances of HKD30 billion against total borrowings of HKD10 billion. Wharf's investment property portfolio of HKD324 billion is mainly unencumbered, providing it further financial flexibility. FULL LIST OF RATING ACTIONS The Wharf (Holdings) Limited - Long-Term IDR of 'A-' placed on RWN - Ratings of 'A-' on senior unsecured notes placed on RWN Wharf Finance Limited - Ratings of 'A-' on senior unsecured notes placed on RWN Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He +86 21 5097 3015 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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