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TEXT-Fitch affirms Swire at 'A'; outlook stable
(The following statement was released by the rating agency)
May 18 - Fitch Ratings has affirmed Hong Kong-based Swire Pacific Limited's (Swire) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A' with a Stable Outlook. Fitch has also affirmed Swire's foreign currency senior unsecured ratings at 'A'.
The ratings are driven primarily by Swire's quality investment property portfolio in Hong Kong, comprising both prime office and retail space with a value of HKD169.9bn at end-2011. This portfolio enjoys strong occupancy rates and still benefits from rental increases despite softer market conditions in 2012. Despite growing investment in China, contribution from China remains small and will grow to only 10%-15% of property investment earnings over next two to three years.
The company expects capex in the property investment business to taper off from the HKD6.4bn spent in 2011 given limited investment opportunities. The sale of the Festival Walk retail mall for HKD18.8bn has boosted funding available for capex. In addition, the listing of its property business via Swire Properties Limited in January 2012 enhances equity funding opportunities.
Fitch, however, believes that Swire is unlikely to be able to deleverage meaningfully in the next two to three years as it is planning to ramp up capex in the marine services segment, with a capex budget of HKD12.6bn between 2012 and 2014. Despite growing demand for offshore marine services from increased oil and gas exploration, Fitch remains cautious of the keen competition and high operating costs in this industry.
On balance, Fitch believes that the strength of Swire's property segment outweighs the weaker business profiles of its other businesses, which drives the Stable Outlook. The agency expects Swire's recurring income interest coverage (as measured by investment property EBITDA/gross interest expense) to stay above 3x through to 2014.
Fitch does not envisage any positive action on Swire's rating as the geographic concentration of its property portfolio in Hong Kong is a constraint. Negative rating guidelines include sustained deterioration in investment property EBITDA/gross interest expense below 3x; any provision of financial support to its 45% airline, Cathay Pacific Limited; and any change in business mix resulting in a smaller role for investment property.
Fitch also notes that Swire Properties may refinance the existing shareholders loan from Swire (HKD21.37bn at end-2011) with external funding as the loan matures. As the proportion of Swire Properties' external funding grows, its debt will structurally subordinate debt at Swire's level in terms of access to investment property cashflows. When such structural subordination becomes meaningful, Fitch may deconsolidate Swire Properties in its analysis of Swire's credit profile. In this event, cash dividends received from Swire Properties, however, will be included in Swire's operating earnings.
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