Fitch Affirms Lai Fung at 'BB-', Outlook Stable

Mon Jun 9, 2014 2:13am EDT

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(The following statement was released by the rating agency) HONG KONG/SINGAPORE, June 09 (Fitch) Fitch Ratings has affirmed Lai Fung Holdings Limited's (Lai Fung) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB-' and its foreign currency senior unsecured rating at 'BB-'. The agency has also affirmed Lai Fung's Long-Term Local Currency IDR at 'BB-' and its local currency senior unsecured rating at 'BB-'. The Outlooks on the Long-Term IDRs are Stable. The rating affirmation is based on Lai Fung maintaining a low level of leverage and stable growth in rental income. It also takes into consideration that there will be enough debt headroom for Lai Fung to develop a project in Hengqin, a city in southern China that is close to Macao. We think the rentals to be generated will help expand its recurring income base. KEY RATING DRIVERS Prudent Financial Management: Lai Fung's leverage remained low in the past two years because it achieved positive operating cash flows. Property leasing, rather than property development, is its long-term focus. As a result, Lai Fung has not been active in replenishing its land bank. It sells residential projects progressively to support the expansion of its leasing portfolio. The current low leverage provides enough debt headroom for Lai Fung to develop its new project in Hengqin. Long-Term Positive Contribution from Hengqin: The Hengqin Creative Culture City project will be a sizeable investment for Lai Fung. It may raise Lai Fung's leverage noticeably in the short to medium term, but will become another key source of recurring income in the long run. We estimate Lai Fung's leverage (total debt/property assets) will increase to 34% in FY16 from 28.6% in FY14, though that will still be below the threshold where Fitch would consider negative rating action. We expect leverage to fall gradually in FY17-18 once the peak of investment period has passed. The project will generate rental income once it is completed in FY18. Potential Risks in Hengqin Project: The biggest risk for Lai Fung associated with the Hengqin project is a delay in the project completion, which may drive the company's leverage higher on a sustained basis. Another potential risk is Lai Fung acquiring Phase 2 of the project prematurely, for example, before evidence of satisfactory performance in Phase 1. Rental Income Sources Concentrated: Lai Fung's rental income is dependent on Shanghai Hong Kong Plaza, which contributed 69% of its gross rental revenue in FY13. Fitch expects the Chinese government's anti-graft campaign and economic slowdown on the mainland to continue to limit rental growth from the mall. As more investment properties are completed in the next few years, however, Fitch expects Shanghai Hong Kong Plaza's share of Lai Fung's gross rental revenue to fall to about 50% in FY16-FY17. Temporary Interest Coverage Drop: We expect Lai Fung's investment property EBITDA coverage to fall in FY14 and touch 1.0x, the floor at which Fitch could consider negative rating action. This is because the company had to pay the interest on two bonds due April 2014 and April 2018. The latter was issued in April 2013 to pay off the bond that matured in April 2014, after which Fitch expects interest coverage to rebound and stay at 1.5x in FY15. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include- - EBITDA for investment properties/interest expenses falling below 1.0x (FY13: 1.5x) on a sustained basis - Total debt/property assets exceeding 40% (37% at end-1HFY14, 27% if excluding the 2007 bond) on a sustained basis - Increase of development assets to above 25% (15% at end-1HFY14) of total property assets Positive: Positive rating action is not expected in the next 18-24 months due to Lai Fung's small operational scale and high capex resulting in negative free cash flow. However, future developments that may, individually or collectively, lead to positive rating action include: - EBITDA from investment properties rising above HKD600m (FY13: HKD358m) and EBITDA for investment properties/interest expenses exceeding 1.5x on a sustained basis. Contact: Primary Analyst Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Michelle Leong Associate Director +852 2263 9929 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; 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 28 May 2014 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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