Fitch Assigns Wharf's US Dollar Notes 'A-(EXP)' Rating

Tue Jan 14, 2014 11:29pm EST

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(The following statement was released by the rating agency) HONG KONG, January 14 (Fitch) Fitch has assigned Wharf Finance Limited's proposed US dollar notes an expected rating of 'A-(EXP)'. The notes are to be unconditionally and irrevocably guaranteed by The Wharf (Holdings) Limited (Wharf; A-/Stable). The notes are rated at the same level as Wharf's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the Hong Kong-based company. The final rating of the proposed notes is contingent upon receipt of documents conforming to information already received. The proposed notes are to be issued as part of Wharf's USD5bn medium-term note programme rated 'A-' by Fitch. KEY RATING DRIVERS Robust HK Retail Portfolio: Wharf is the market leader in retail leasing in Hong Kong (HK), with its tenants commanding a nearly 10% share of HK's retail sales. Wharf is experienced at upgrading its malls with continued asset enhancement, tenant repositioning and promotional activities. While the overall HK retail sales growth will continue to slow after exceptionally strong performance in 2010-2011, we still expect Wharf's tenants to achieve single-digit to low-teens retail sales growth and Wharf's malls to maintain positive rental reversion in 2014 given its leading position. China Rentals Start Contributing: Wharf will have one major shopping mall starting operation in China each year in 2014-2016. The series of mall openings will provide a growth driver for leasing income, amid slowing HK retail sales growth. The 0.21m square metre (sqm) mall at Chengdu International Finance Square (IFS), which was 92% leased at mid-2013, will open in January 2014. Wharf indicated that the mall will produce CNY500m of annual revenue when fully operational. The openings of Chongqing IFS and Changsha IFS will follow in 2015-2016, significantly increasing Wharf's leasing gross floor area. China Sales Support Capex: Wharf's contracted sales have reached a level that can better finance its property development. In 2010-2011, Wharf incurred heavy capex due to land purchases. It expanded its land bank to 12.0m sqm in end-2010 from 9.6m sqm in end-2009, with just CNY8.8bn of contracted sales. In 2012-2013, higher land prices led Wharf to curtail its land purchases. Wharf's enlarged sales base will be able to support its current cash outflow scale. However, we do not rule out the possibility of a sizable acquisition in China if opportunities arise, which may drive up Wharf's leverage level. China Investment Constrains Ratings: Wharf is one of the most active HK firms investing in the China property space. It has a long-term target of increasing its China assets to 50% of the firm's assets. While Wharf will achieve about CNY20bn of China contracted sales in 2013, other HK developers are making less than CNY10bn.Wharf has also invested in listed Chinese developers, such as Sino-Ocean and Greentown. We think Wharf's China investment strategy increases its risk profile and remains a major rating constraint. Prudent Financial Management: Wharf has been able to maintain its leverage (net debt/investment portfolio value) at 20%-25% over the past three years, despite its expansion in China. Fitch expects Wharf's leverage to sit comfortably below 30% in 2014, well below our threshold of 40% where negative rating action may be considered. We expect Wharf's investment property interest coverage to edge down in the next few years, although it should still stay above 3.5x and above our trigger of 2.75x. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include- -Investment property EBITDA/gross interest expense sustained below 2.75x (2012: 4.3x), or -Recurring EBITDA/gross interest expense sustained below 3.5x (2012: 5.8x), or -Net debt/investment property approaching 40% (end-2012: 24.0%), or -Material investment in Chinese homebuilders, including increase in investment in Greentown China. Positive: Fitch does not envisage any positive action until the company's financial metrics improve to the levels of similarly rated peers. Contact: Primary Analyst Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 2801, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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