Fitch Affirms Swire Properties at 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Hong Kong-based Swire Properties Limited's (Swire Properties) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A' with a Stable Outlook. Fitch has also affirmed Swire Properties' foreign-currency senior unsecured rating, and the ratings on the medium-term note programme and issues from Swire Properties MTN Financing Limited at 'A'.
The affirmation reflects the delivery of stable rental income from its mature investment property portfolio, which provides strong gross rental income coverage ratios. The company has remained prudent regarding expansion in China, and demonstrated strong execution in boosting rental income in China. Its financial position remains solid, with healthy liquidity.
KEY RATING DRIVERS
Stable Hong Kong Rentals: Swire Properties' gross rental income from its investment properties rose by 3.8% in 2015, which resulted in a strong gross rental income coverage ratio of 5.6x. Gross rental income from Hong Kong increased by 3.3% to HKD8.7bn, thanks to the solid demand for office space and the full occupancy levels for its retail properties in Hong Kong. Swire Properties has a well-established Grade A office portfolio in both the central business district and non-central areas (such as eastern Hong Kong). The diversity of the office portfolio mitigates the risk of weakening rents due to the sluggish financial industry. Swire Properties is also repositioning its tenant mix at the Pacific Place Mall by introducing more food & beverage outlets and new brands targeting young professionals.
Growth via Redevelopment: The redevelopment of the Taikoo Place techno-centres to Grade A office space will strengthen Swire Properties' leasing income in the medium to long term. Redevelopment sites carry lower execution risks, and allow Swire Properties to tap resilient demand for office and other commercial space in existing well-developed areas.
Rising Rentals in China: Swire Properties will increase its attributable gross rental income in China in 2016 as the Sino-Ocean Taikoo Li in Chengdu will be in its first full year of operation. HKRI Taikoo Hui will open in 4Q16 and contribute to its rental income in 2017. Swire Properties is prudent in its expansion in China as it only invests in first-tier cities (for example, Guangzhou, Beijing and Shanghai) or second-tier cities with very strong potential (for example, Chengdu).
US Operation Self-Funded: The residential component of Brickell City Centre (BCC) in Miami was 65% sold as of end-March 2016. The first of the two office towers at Brickell City Centre opened in March 2016, while the retail component will open in late 2016.
Less Reliance on Parent's Funding: Swire Properties will continue to refinance its existing inter-company loans from Swire Pacific Limited (A-/Stable) with external funding sources. Borrowings from Swire Pacific had fallen to 32% of total borrowings by end-2015 from 74% at end-2011. We expect this ratio to drop further in 2016. This is neutral for Swire Properties' credit rating because Fitch expects the company's stable rental income streams will support its current credit profile.
Adequate Interest Coverage: Fitch expects Swire Properties' recurring interest coverage (investment property EBITDA/gross interest expense) to stay above 4.5x in the next few years, due to additional leasing income from newly completed properties.
Fitch's key assumptions within the rating case for the issuer include:
- Total rental income growth at 0%-4% in 2016-2018
- EBITDA margins at 48%-61% in 2016-2018
- Capex to peak at HKD10bn in 2016, declining to HKD4bn-5bn per year in 2017-2018
Positive: Developments that may, individually or collectively, lead to positive rating action include:
Fitch does not envisage any positive rating action within the next 12-18 months, until Swire Properties' China investment portfolio reaches a critical mass, which would enable the company to achieve meaningful geographical diversification for its leasing income.
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Investment property EBITDA/gross interest expense falls below 4.0x on a sustained basis (2015: 5.6x)
- There is an aggressive expansion in China with heightened execution and financial risk
- Significant weakening of Swire Pacific's non-property business which may require Swire Properties to increase its support to the Group
Healthy liquidity: Swire Properties had a cash balance of HKD4.4bn, undrawn committed facilities of HKD7.8bn and undrawn uncommitted facilities of HKD1.6bn as of end-2015, which is more than sufficient to cover its short-term debt of HKD7.3bn. None of its debt is secured, which gives it flexibility in financing options.
FULL LIST OF RATING ACTIONS
Swire Properties Limited
Long-Term Issuer Default Rating affirmed at 'A'; Stable Outlook
Long-Term senior unsecured rating affirmed at 'A'
Rating on Swire Properties MTN programme affirmed at 'A'
Rating on issues from Swire Properties MTN Financing Limited affirmed at 'A'