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May 30 (The following statement was released by the rating agency)
Fitch Ratings has downgraded Hong Kong-based Swire Pacific Limited's (Swire Pacific) Long-Term Foreign-Currency Issuer Default Rating (IDR) and foreign-currency senior unsecured rating to 'A-' from 'A'. The Outlook has been revised to Stable from Negative. Fitch has also downgraded Swire Pacific's foreign-currency senior unsecured rating and the rating of Swire Pacific MTN Financing Limited to 'A-' from 'A'.
The downgrade reflects the increase in direct debt funding by Swire Properties Limited (Swire Properties; A/Stable), its 82%-owned subsidiary. This increases Swire Pacific's structural subordination to Swire Properties' operating cash flows. The current rating reflects continued stable performances in Swire Pacific's beverages and trading & industrial divisions, and improved performances in its aviation and marine services divisions. It also continues to maintain a prudent financial profile with good access to funding.
KEY RATING DRIVERS
Increased Structural Subordination: At end-2013, 61% of Swire Properties' borrowings were sourced externally instead of from Swire Pacific, up from 51% at end-2012 and 26% at end-2011. This trend increases Swire Pacific's structural subordination to the stable operating cash flows of Swire Properties, which come from its investment properties portfolio.
Strong Rental Income from Swire Properties: Fitch has affirmed Swire Properties' rating of 'A' with Stable Outlook, reflecting its well-established Grade A office portfolio in both the central business district and non-central areas in Hong Kong. The gross rental income from Swire Properties' investment properties in Hong Kong has posted 2.9% CAGR since 2009. It reached HKD8bn in 2013 and has been consistently above HKD7bn in the past five years. The investment property portfolio provided a strong and stable investment property EBITDA to gross interest expense ratio of 4.5x-4.8x for Swire Properties and of 3.4x-4.5x for Swire Pacific for 2010-2013.
Higher Capex for Marine Services: Swire Pacific has made capex of HKD12.9bn in the marine services division since 2011 to revitalise its ageing fleet and to shift to deep-sea marine services. The company budgeted a further HKD7.2bn capex for the next three years. This has weakened Swire Pacific's free cash flows and increased its non-property-related debt to HKD27.0bn at end-2013 from HKD19.8bn and HKD10.8bn at end-2012 and end-2011 respectively.
However, with a younger fleet focusing deep-sea marine services, Swire Pacific has been able to charge higher charter rates with an increase of USD6,275/day in 2013 compared with an increase of USD1,773/day in 2012. The fleet's utilisation rate also improved and stabilised around 89%-90% in 2012-2013 versus 80%-86% in 2010-2011. These factors increased the segment's EBITDA to HKD2.4bn in 2013, a 54% increase from HKD1.6bn in 2012.
Benefits from Diversification: There is a negative correlation between the airline and marine service businesses. Higher oil prices support the marine business but dampen Cathay Pacific Airways' business, and vice versa. Other businesses add to its diversification while the trading and beverages businesses have stable performance and require predictable minimal capex.
Strong Liquidity; Healthy Debt Maturity Profile: Swire Pacific has an ample amount of undrawn credit facilities, which are more than enough to cover its short-term debt maturity. At end-2013, Swire Pacific has HKD11.3bn cash and HKD19.5bn committed undrawn facilities, compared with HKD7.1bn in short-term debt. Swire Properties' debt maturity profile is spread out, with less than 30% of debt falling due in the next two years. Currently, none of its debt is secured, which gives it flexibility for different financing options.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Material decline of Swire Pacific's shareholding in Swire Properties
- There is negative rating action on Swire Properties
- Weakening of Swire Pacific's non-property businesses, especially if it provides material financial support to Cathay Pacific Airways
Positive: No positive rating action is envisaged over the next 18-24 months until the company's financial metrics improve to the levels of similarly rated peers.