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June 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Hong Kong-based Swire Pacific Limited's (Swire Pac) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A'. The Outlook has been revised to Negative from Stable. The agency has also affirmed Swire Pac's foreign-currency senior unsecured rating at 'A'.
Key Rating Drivers
Increasing structural subordination: The Outlook revision is a result of the increase in direct debt funding by Swire Properties Limited (Swire Prop, A/Stable), its 82%-owned subsidiary. At end-2012, 51% of Swire Prop's borrowings were sourced externally as opposed to on-lending from Swire Pac, up from 26% at end-2011. This trend increases Swire Pac's structural subordination to the high quality operating cashflows of Swire Prop.
However, even if Swire Prop becomes completely self-funding, Swire Pac's rating will likely be just one notch lower than Swire Prop's. This is due to Swire Pac's high ownership of Swire Prop, Swire Prop's reliance on senior unsecured debt funding (which lowers structural subordination), and the average credit profile of Swire Pac's non-property businesses. Changes in Swire Prop's leverage level may change this view as the level of structural subordination may be altered.
Swire Prop remains strong: Fitch has affirmed Swire Prop's rating of 'A' with Stable Outlook reflecting its well-established Grade A office portfolio in both the central business district and decentralised area in Hong Kong. The diversified exposure of its office portfolio mitigates the risk of weakening rents due to the sluggish financial industry environment. The company's Taikoo Place office towers in Island East, charging much lower rents than Central office buildings, still benefitted from a steady rental trend in 2012. The Pacific Place office towers in Admiralty, although being affected by weaker leasing demand from financial services tenants, can still maintain a premium rental level in the district.
High capex in marine services: The marine services segment has embarked on a high capex plan since 2011 to revitalise its aging fleet. Segment capex in 2012 was HKD5.6bn, and the company has budgeted a further HKD5.2bn for 2013. This has weakened Swire Pac's free cash flows and increased its non-property-related debt to HKD19.7bn at end-2012 from HKD10.8bn a year earlier.
However, with a younger fleet, Swire Pac has been able to charge higher charter rates. Furthermore the continued high oil price has resulted in high utilisation rate of 90% in 2012. These factors increased segment EBITDA by 22% to HKD1.6bn in 2012. Fitch believes that the growth in marine services will likely offset the fall of dividend income from airline associate, Cathay Pacific Limited, which continues to suffer from weak yields and high fuel costs.
Benefits from diversification: Swire Pac's marine services and airline businesses are negatively correlated to each other with regards to oil prices. Other businesses, such as trading and beverages, further add to its diversification.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Swire Prop's self-funding proportion rises above 67% (2012: 51%) while maintaining its current leverage level
- Swire Prop's proportion of secured borrowings increase substantially (none currently)
- Material decline of Swire Pac's shareholding in Swire Prop (currently 82%)
- There is a negative rating action on Swire Prop
- Weakening of Swire Pac's non-property businesses, especially if it provides material financial support to Cathay Pacific
Positive: No positive rating action is envisaged over the next 18-24 months.