(The following statement was released by the rating agency)
Dec 06 -
-- Hong Kong-based commercial property investor Hysan has increased the
quality and scale of its leasing property portfolio following the opening and
satisfactory leasing of its new retail and office property, Hysan Place.
-- We expect the company's financial performance to improve materially in
the next two years, due to the contribution from Hysan Place and continued
positive "rental reversions" in Hong Kong's favorable commercial property
-- We are raising our long-term corporate credit rating on Hysan and the
issue ratings on its outstanding notes to 'BBB+' from 'BBB'; the Greater China
regional ratings remain 'cnA+'.
-- The stable outlook reflects our expectation that Hysan will maintain
its solid market position in Causeway Bay and generate increasing cash flows
and profits while sustaining low leverage over the next 24 months.
On Dec. 6, 2012, Standard & Poor's Ratings Services raised its long-term
corporate credit rating on Hong Kong-based commercial property investor Hysan
Development Co. Ltd. to 'BBB+' from 'BBB'. The outlook is stable. We also
raised our issue ratings on all the senior unsecured notes issued by Hysan
(MTN) Ltd. and guaranteed by the company to 'BBB+' from 'BBB'. The long-term
Greater China regional scale ratings on the company and its senior unsecured
notes remain 'cnA+'.
We raised the rating on Hysan because we believe the company's cash flows and
leverage will materially improve, given a stronger market position and
increased rental income following the opening and satisfactory leasing of its
new retail and office property, Hysan Place. We assess the company's business
risk profile as "satisfactory" and its financial risk profile as "modest," as
the terms are defined in our criteria.
In our opinion, Hysan has improved the scale, quality, and tenancy mix of its
portfolio following the completion of Hysan Place. The company's competitive
position in Causeway Bay, one of Hong Kong's major commercial and retail
districts, has also improved with the addition of the large mixed-use building
in a prime location. Hysan Place has a total gross floor area of 710,000
square feet, which has expanded Hysan's retail portfolio space by 50.0% and
the office portfolio by 12.4%. The company had leased out 100% of the retail
space and 43% of office space by October 2012.
We expect Hysan Place's office occupancy rate to gradually improve over the
next year, as tenants are likely to seek lower-cost space due to steep rents
in Central, Hong Kong's central business district. Hysan will continue to
benefit from the tight supply of new office and retail space, particularly in
the Causeway Bay area, and our forecast for moderate retail sales growth,
which should help to push up spot rental prices.
We estimate that Hysan's financial performance will improve strongly in 2012
and 2013, driven by new rental income from Hysan Place and "positive rental
reversions" (or rent increases) when existing leases expire. In our base case,
we estimate 25% revenue growth in 2012 and 14.5% in 2013. We expect the
company to maintain high occupancy levels averaging about 95%, due to
stability in the leasing market. We also estimate that the EBITDA margin will
decline to 75.5% from 78.1% in 2011 because of one-off expenses and an
increase in overheads associated with the opening of Hysan Place. The margins
should recover to about 78.0% in 2013, with an expected improvement in
occupancy and full-year contributions from the new building.
We expect Hysan to increase its free cash flows and anticipate that it will
use surplus cash to reduce its total borrowings in the next two years. In our
base case, we estimate total borrowings will decline to about Hong Kong dollar
(HK$) 6.3 billion by the end of 2012 and HK$6.1 billion by the end of 2013
from a peak of HK$7.0 billion in 2011. With improving cash flows and declining
borrowings, Hysan's leverage--or the ratio of debt to capital--could fall to
10.8% by the end of 2012 and 10.3% in 2013 from 12.1% at the end of 2011. Cash
flow coverage--or the ratio of funds from operations (FFO) to debt--could
improve to about 25% in 2012 and 30% in 2013 from 18.4% in 2011.
The peak of Hysan's capital spending program is over. In our base case, we
have factored in HK$500 million-HK$800 million in capital expenditure for
refurbishment and asset enhancement for 2013-2014. However, the amount will be
significantly less than the capital expenditure for the past two years. The
company is repositioning its property portfolio to meet growing demand from
retailers, which suggests potential expenditure to redevelop some of its older
office buildings over the next two to three years.
The rating on Hysan also reflects the company's conservative and consistent
financial management and "exceptional" liquidity. In our view, Hysan selects
development projects very cautiously and focuses on enhancing asset quality
and improving property values rather than on large acquisitions and expansion.
The company has a good track record of maintaining low leverage and good
Hysan's relative small scale and the high geographic concentration of its
property portfolio temper the above strengths. The company has a limited
number of properties and the majority of these are small-to- mid sized. All
its properties are located in Causeway Bay.
Hysan's liquidity is" exceptional," as defined in our criteria. We expect the
company's sources of liquidity to exceed uses by 2.0x or more in the next
year. Our liquidity assessment incorporates the following factors and
-- Primary liquidity sources in 2013 include cash and cash equivalents
that we estimate at HK$2.0 billion as of the beginning of 2013, committed and
undrawn bank facilities of about HK$1.0 billion, and FFO of about HK$1.9
-- Primary liquidity uses in 2013 include debt maturities of HK$700
million, capital expenditure of HK$800 million, and dividends of about HK$800
-- In our view, Hysan has good banking relationships and capital market
standing in Hong Kong. The company also has a US$1 billion medium-term note
program, which it has intermittently used to raise funds.
-- The company's securities investments, which have a carrying value of
about HK$1.6 billion as of June 30, 2012, provide an added liquidity buffer.
We did not include these as a liquidity source in our calculation.
-- Hysan has limited and fairly loose financial covenants on its bank
loans. The company has good headroom to absorb a low-probability, high-impact
event. We estimate that the company will not breach covenant test measures
even if our forecasted EBITDA falls by 50%.
The stable outlook reflects our expectation that Hysan will maintain its solid
market position in Causeway Bay and generate increasing cash flows and profits
in a favorable commercial property market in the next 12-24 months. We also
expect the company to maintain low leverage and strong liquidity.
We could lower the rating if the company's cash flow protection and capital
structure weakens due to a sustained deterioration in the commercial property
market in Hong Kong. We could also downgrade Hysan if the company deviates
from its focused and conservative strategy by undertaking large and aggressive
debt-funded acquisitions or if its property occupancy drops significantly. An
FFO-to-debt ratio of less 15% could indicate that its credit profile has
The potential upside to the rating in the next 24 months is limited due to the
high geographic concentration of Hysan's portfolio and its relative small
scale compared with peers that we rate 'A-'. We may raise the rating if the
company expands and diversifies its income-generating real estate portfolio
and improves its asset quality while maintaining strong cash flows and low
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies,
June 21, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; Outlook Action
Hysan Development Co. Ltd.
Corporate Credit Rating BBB+/Stable/-- BBB/Positive/--
Hysan (MTN) Ltd.
Senior Unsecured BBB+ BBB
Hysan Development Co. Ltd.
Corporate Credit Rating
Greater China Regional Scale cnA+/--/--
Hysan (MTN) Ltd.
Senior Unsecured cnA+