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Rating Action:

MOODY'S AFFIRMS SWIRE'S A3 RATING, OUTLOOK STABLE

24 Apr 2003
MOODY'S AFFIRMS SWIRE'S A3 RATING, OUTLOOK STABLE

Hong Kong, April 24, 2003 -- Moody's Investors Service has affirmed the A3 senior unsecured rating of Swire Pacific Ltd (Swire) and its guaranteed subsidiaries, with a stable outlook. Moody's says that although the outbreak of Severe Acute Respiratory Syndrome (SARS) in Hong Kong will pressure the performance of Swire's property rental portfolio and its aviation business through its 46%-owned Cathay Pacific Airways (Cathay), it is not likely to have any material impact on its rating in the near term.

The A3 rating continues to reflect Swire's prudent financial strategy and strong business management, which enable the company to maintain a sound financial profile and good financial flexibility. The rating also reflects Swire's quality property portfolio, which generates stable cash flow. At the same time, the rating takes into account Swire's geographic concentration in Hong Kong and its holding company structure. The rating further factors the current weak office rental market in Hong Kong.

Moody's takes comfort from Swire's adequate internal and back-up liquidity to meet its debt repayment obligations in the next 12 months. Swire is expected to generate gross cash flow of approximately HK$4 - 4.8 billion in FY03, incorporating the downside scenario assumed by Moody's. This is sufficient to cover its projected capex and dividend payment of about HK$3.5 billion. Moody's notes that Swire has approximately HK$4 billion maturing debts in 2003, which will be sufficiently covered by the projected free cash flow and available committed bank facilities of HK$5.5 billion (as of March 31, 2003) extended by a group of long standing relationship banks. These bank facilities contain MAC (Material Adverse Change) clauses but there are no rating triggers. Swire's management has confirmed that the recent outbreak of SARS and the profit warning issued by Cathay will not be considered as a MAC for Swire, and the committed bank facilities will continue to be available for drawing.

Moody's also understands that Swire is in the process of arranging new medium term bank financing to meet its potential cash outlay of HK$5 billion to settle the land premium arbitration with the Hong Kong Government and to enhance its financial flexibility. Moody's expects that the company's investment grade rating and sound financial profile will enable it to raise the necessary funding requirement successfully.

Moody's notes that rental income accounts for over 70% of Swire's operating profits (excluding Cathay's dividend), of which approximately 40% is contributed by its retail portfolio. The SARS outbreak has adversely affected the retail sector, which is hit by reduced tourist and consumer spending, and raised the pressure for temporary rental reduction for hard-hit retail shops and restaurants. While it may lower Swire's rental income in the short term, Moody's expects that the impact will be relatively small. Moody's however notes that if SARS persists, it will further pressure Swire's rental income arising from the continuing rental rebate and lower rental rate as leases come up for renewal. At the same time, Moody's considers that Swire's retail portfolios are located in prime sites with relatively good quality tenants, which provide support to its rental performance.

Moody's also recognizes that Swire is exposed to the negative developments in the aviation business through Cathay, which has been suffering from a substantial drop in passenger numbers and cancellation of flights. The current daily cash burn rate of Cathay is approximately US$3 million (based on Cathay's most recent communications to staff). According to Swire's management, this US$3 million includes payment for all debts maturing in 2003 which amount to a total of HK$3.5 billion subsequent to recent refinancing activity. Based on publicly available information, Cathay had freely available liquid reserves of HK$11 billion as at December 31, 2002, comprising short-term bank deposits and debt securities. It would appear that Cathay has a good liquidity position to withstand this cash loss for at least 10 months. This calculation excludes the available committed bank lines and any committed capex - on which we do not have information - and any possible shareholder support.

In addition, Moody's understands that Cathay generated positive free cash flow in 1Q2003 due to a strong start in January and February. Its available liquid reserves at the end of March 2003 should thus be higher than that for December 2002. We also understand that Cathay is taking measures to reduce the daily cash burn rate. Moody's therefore expects that there is a low likelihood of Swire, as the major strategic shareholder, having to inject funds into Cathay over the next few months.

Moody's notes that it remains uncertain at this stage as to how long SARS will persist and its long term effects are therefore extremely hard to quantify. Moody's will continue to monitor developments, and if SARS persists, evaluate the potential rating impact over the next few months of the need and willingness for Swire to inject funds into Cathay and the pressure on its property rental income.

Swire Pacific Limited, headquartered in Hong Kong, is engaged in property trading and investment, and aviation - the latter mainly through 46%-owned Cathay Pacific. Other activities include beverage bottling, industrial, marine services, and retailing operations.

Sydney
Brian Cahill
Managing Director
Corporate Finance
Moody's Investors Service Pty Ltd
612 9270 8100

Hong Kong
Gary Lau
VP - Senior Credit Officer
Corporate Finance
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

No Related Data.
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