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Rating Action:

MOODY'S ASSIGNS A2 RATING TO THE PROPOSED 10-YEAR EUROBONDS ISSUE GUARANTEED BY HONGKONG LAND CO. LTD, OUTLOOK STABLE

16 Apr 2004
MOODY'S ASSIGNS A2 RATING TO THE PROPOSED 10-YEAR EUROBONDS ISSUE GUARANTEED BY HONGKONG LAND CO. LTD, OUTLOOK STABLE

Hong Kong, April 16, 2004 -- Moody's Investors Service has assigned an A2 debt rating to the proposed senior unsecured 10-year Eurobonds issued by the Hongkong Land Finance (Cayman Islands) Co. Ltd., based on the irrevocable and unconditional guarantee of Hongkong Land Co., Ltd. (HKLC). The bonds' proceeds will primarily be used for general corporate purpose. The rating outlook is stable.

The rating reflects HKLC's relatively stable cash flow generated from its high quality and resilient commercial property portfolio, and its leadership position in the high-end property sector in Hong Kong with good quality tenants. This has in the past translated into premium pricing for HKLC's office properties, which generates about 76% of HKLC's gross rental income. Majority of its portfolio is located in the heart of the Central Business District in Hong Kong. The buildings are conveniently located with extensive transport links and are generally well maintained. Moody's believes that the prime location, HKLC's good property management and its dominant position enable it to effectively protect its strong franchise in Central Business District and maintain its competitiveness. At the same time, the rating recognizes the geographic and tenant concentration of HKLC's property portfolio, and its high dividend payout policy, hence the resultant slow capital formation.

The stable outlook reflects the fact that the stabilization of the Hong Kong office sector -- due to the ongoing local and global macro-economic upturn -- has alleviated the agency's concerns over further material deteriorations in the Territory's rental and property prices. These developments have, in turn, eased the potential pressures expected on the cash flows and financial profiles of the HongKong Land Group. Office space take-up has improved and rental rates have been firming since the start of 2004. Moody's believes that the lower level of new supply expected in the coming 2 years and the business opportunities arising from the Closer Economic Partnership Arrangement (CEPA) between the HK SAR and PRC governments will provide support for office demand.

At the same time, the upturn in the retail rental market is being supported by consecutive periods of rising retail sales, fuelled in turn by the resurgence in local consumer spending and continued growth in inbound tourism. Given that new retail space supply is low, Moody's expects the current rental trend to prove sustainable, unless any unexpected events emerge. Retail rental income contributed to about 23% of HongKong Land's total rental income in FY2003.

Moody's, however, does not expect the Group's financial matrices to strengthen significantly as the rating agency does not anticipate the office sector's negative rental reversion to reverse until 2005, when the renewal of high cost leases concluded in 2000/2001 will be complete.

Given that the impact of negative rental reversion is not expected to disperse before 2005, it is unlikely that HongKong Land's ratings would be upgraded in the next two years. However, upward rating pressure could evolve, beyond that period, if the Group manages to diversify its income stream, possibly through increasing the retail rental contribution or through successful investments beyond the Territory.

On the other hand, the Group's financial profile is modest for its rating level. The rating reflects Moody's expectation that the Group's financial matrices will stabilize and then improve in the next two years and that it will continue to manage its redevelopment initiatives and reposition its asset portfolio with financial prudence. Furthermore, it will exercise flexibility -- as circumstances require -- in its dividend pay-out policy. Moody's says rating pressure could evolve if Group's leverage were to increase beyond 50% and its Gross Cash Flow/Gross Interest fell below 2x.

HKLC, incorporated in Hong Kong, is the wholly-owned subsidiary of Hongkong Land Holdings Ltd. (HKLH), which is a Bermuda-incorporated holding company, engaged in property investment, management and development. HKLC holds the group's 5 million sq. ft. prime office and retail space in Hong Kong. HKLH is 42% owned by Jardine Strategic, which in turn is 79% owned by the Bermuda based conglomerate, Jardine Matheson.

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

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

No Related Data.
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