Fitch Affirms Swire Pacific at 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Hong Kong-based Swire Pacific Limited's (Swire Pacific) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook. Fitch has also affirmed Swire Pacific's foreign-currency senior unsecured rating, and the ratings on the medium-term note programme and issues from Swire Pacific MTN Financing Limited at 'A-'.
The affirmation reflects Swire Pacific's stable financial profile, driven by the improved performance of its key contributing subsidiary, Swire Properties Limited (A/Stable), improving profitability at its aviation division and the beverage division, that offset a weakening marine-services division. The company will expand its capex in the beverage division in 2016, to generate more recurring income in the medium to long term.
KEY RATING DRIVERS
Higher Rental Income from Swire Properties: Swire Properties provides stable and predictable rental income to Swire Pacific. Swire Properties, 82%-held by Swire Pacific, thrives on its well-established Grade A office portfolio in Hong Kong. The 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.
Improved Contribution from Cathay Pacific: Swire Pacific's 45%-owned associate, Cathay Pacific group, increased its attributable profit by 90% to HKD2.7bn thanks to strong passenger demand in economy class and the 18% reduction in net fuel cost. The aviation division should continue to perform well in the near term due to the low fuel prices and strong passenger demand, offsetting the weak demand for cargo and premium cabin.
Expanding Franchise Territory for Beverage: Attributable profit of the beverage division rose by 14% to HKD976m, driven by profit growth in Hong Kong, Taiwan and the US. The division added Denver and Colorado Springs in its franchise territory in 2014, which saw the full-year impact in 2015. Swire Beverages entered into a conditional agreement with The Coca-Cola Company (TCCC) to enlarge the franchise territory in the US by including the state of Arizona in 2016, and a Letter of Intent with TCCC to include the states of Washington, Oregon and Idaho. Fitch believes the assets to be acquired by this division will be operational and cash-generating immediately.
Reduced Marine-services Capex: The marine services division's attributable loss of HKD1,255m was due to reduction of spending by exploration and production companies amid low oil prices. The fleet's utilisation rate dropped to 74.9%, from 86.6% in 2014, after peaking at 90% in 2012. Swire Pacific reduced its capex for this division by 55% yoy to HKD1,490m amid the weakened demand for marine services. The capex commitment for 2016-2018 is HKD2.7bn. The oversupply of offshore vessels will continue to exert pressure on utilisation and daily charter hire rates.
Structurally Subordinated to Swire Properties: Swire Properties is relying less on its parent for funding. Its external borrowings accounted for 68% and 62% of the company's total as of end-2015 and end-2014, respectively, compared with 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 property portfolio.
Fitch's key assumptions within the rating case for the issuer include:
- Swire Properties' total rental income growth at 0%-4% in 2016-2018
- Total revenue growth rates of 0%-8% in 2016- 2018
- EBITDA growth rates of 1%-2% in 2016-2018
- Capex to peak at HKD14bn-15bn in 2016, declining to HKD7bn-8bn 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 financial metrics improve to the levels of similarly rated peers.
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Significant weakening of Swire Pacific's non-property business which may require Swire Properties to increase its support to the Group
- Substantial decline in Swire Pacific's shareholding in Swire Properties
- Any negative rating action on Swire Properties
- Swire Pacific's future capex causes a sustained deterioration in its credit metrics relative to those of Swire Properties
Healthy liquidity: Swire Pacific had HKD9.0bn in cash and HKD22.1bn in committed undrawn facilities at end-2015, more than enough to cover its short-term debt of HKD6.8bn. None of its debt is secured, which gives it flexibility in financing options.
FULL LIST OF RATING ACTIONS
Swire Pacific Limited
Long-Term Issuer Default Rating affirmed at 'A-'; Stable Outlook
Long-Term senior unsecured rating affirmed at 'A-'
Rating on Swire Pacific MTN programme affirmed at 'A-'
Rating on issues from Swire Pacific MTN Financing Limited affirmed at 'A-'