(The following statement was released by the rating agency)
Oct 16 - Fitch Ratings has affirmed Hong Kong-based The Wharf (Holdings) Limited’s (Wharf) Long-Term Issuer Default Rating (IDR) at ‘A-'. The Outlook is Stable. Fitch has also affirmed Wharf’s senior unsecured rating at ‘A-'.
The affirmation is supported by Wharf’s strong recurring cash flows from its prime retail-focused investment property portfolio in Hong Kong. Its Harbour City and Times Square properties, which represent around three quarters of its HKD209bn investment property portfolio value, commanded a 9% share of Hong Kong’s overall retail sales in 2011 (2010: 8.5%). Its rental portfolio continued to experience positive rental reversion for leases renewed this year, reflecting a strong retail lease market in Hong Kong. Fitch expects this trend to continue in 2013, albeit at a slower rate.
Wharf’s rating is constrained by continued weakening of its financial metrics resulting from its debt-funded expansion in China. Key coverage ratios - investment property EBITDA/gross interest and recurring EBITDA/gross interest - stood at 4.2x and 5.6x, respectively at end-H112 (4.5x and 6.5x, in 2011). These levels are weaker than those of similarly rated peers, and Fitch expects slight further deterioration as the company continues its capex and the full impact of higher cost borrowings incurred in H112 kicks in.
Leverage - as measured by net debt/investment property assets was in line compared with its similarly rated peers at 25% at end-H112. However, even this ratio will likely rise through 2013 as the company spends cash on its build-out in China. Material improvement in credit metrics is only likely when its investment properties in China start contributing meaningfully, most likely from 2015 onwards.
Wharf’s committed capex - primarily in China - amounted to HKD24.6bn at end-H112. Execution of this programme will slightly weaken its coverage ratios as Fitch does not expect the company’s EBITDA and cash balance to sufficiently fund its committed capex. Its cash balance was at HKD19bn at end-H112, and rental EBITDA is around HKD8bn per annum. Short term maturities of HKD6.2bn are well covered by committed undrawn credit facilities of HKD13bn.
The Stable Outlook reflects Fitch’s expectation that Wharf’s strong business profile will continue to outweigh its weak credit metrics, provided the company does not unexpectedly increase its debtor materially increase its exposure to property development.
What could trigger a rating action?
Positive: Fitch does not envisage any positive action until the company’s financial metrics improve to the levels of similarly rated peers.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Investment property EBITDA/gross interest sustained below 2.75x
- Recurring EBITDA/gross interest sustained below 3.5x
- Net debt/investment property approaching 40%
- Material investment in Chinese homebuilders, including increase in investment in Greentown China.