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Global Credit Research - 03 May 2010
Approximately USD2.3 billion in debt securities affected
Hong Kong, May 03, 2010 -- Moody's Investors Service has today affirmed the A3 issuer rating of Swire
Pacific Ltd (Swire) and the senior unsecured bond ratings of its financing
subsidiary, Swire Pacific MTN Financing Ltd. At the same
time, Moody's has affirmed the Baa1 subordinated debt ratings
of Swire Pacific Capital Ltd. The outlook on all ratings is stable.
This affirmation follows the launch of an initial public offering (IPO)
by Swire's subsidiary, Swire Properties Ltd. After
the IPO, Swire is expected to maintain a shareholding of more than
80% in this key subsidiary.
Swire Properties' IPO is expected to raise about HKD20billion,
with the proceeds partly for debt repayment and partly for funding expansion
in both property and other businesses.
"The rating affirmation reflects Swire's improved financial
profile in the near term, but also incorporates the possibility
of it stepping up its capex and investments," says Elizabeth
Allen, a Moody's Vice President and Senior Credit Officer.
"The IPO will provide the appropriate level of funding for its investment
property projects, which are typically highly capital intensive
and have a fairly long investment horizon," adds Allen.
"The group's financial flexibility -- which
could otherwise be further constrained, if it committed to new large-scale
projects in China in the absence of an IPO -- will be further enhanced,"
Specifically, immediately after the IPO, Swire's pro-forma
consolidated credit metrics are expected to rebound to a level that is
strong for the rating, and such improvements will allow it to continue
investing in new property projects.
By contrast, currently, its credit metrics are modest for
its A3 rating, and Moody's had previously commented that it
saw only limited prospects for de-leveraging prior to capex slowing
in 2011 and assuming an absence of new investments.
After bidding for three key property projects in China from 2006,
its credit ratios -- including funds from operations (FFO)/debt
-- moderated from their strongest point of 56% in
FY05 to just under 20% in FY09.
Looking ahead, the key driver for Swire's financial profile
is the pace and size of its new property projects in China. In
particular, Moody's notes that the operating environment in
China is more challenging than Swire's historical market in Hong
Kong, but at the same time its track record has been prudent.
More broadly, Swire's ratings are supported by its prudent
business and financial strategies, as well as the steady cash flow
from its business portfolio, which includes in turn steady rental
income from high-quality investment properties in Hong Kong.
Swire's rating further reflects its diversified business mix,
which includes property, aviation, beverages, marine
services, and trading and industrial operations. As such,
its consolidated operating profile will not be materially affected by
the Swire Properties' spin-off.
On the other hand, these strengths are tempered by its exposure
to the inherently volatile aviation business -- through
its associated company, Cathay Pacific Airways Ltd --
such that dividend inflow is less predictable.
However, in Moody's assessment of Swire, even when it
excludes dividends from Cathay, Swire's credit profile remains
appropriate for its rating. Moody's expects Cathay will continue
to function and be funded on a stand-alone basis and without any
direct financial support from Swire. But, should this prove
otherwise, Swire's rating could come under downward pressure.
As most of Swire's external borrowings are extended --
via inter-company loans -- to Swire Properties on
a back-to-back basis, the cash flows from the properties
subsidiary will directly service this debt, and therefore structural
subordination does not apply to Swire's debt. Furthermore,
Swire's standalone credit metrics (ex-Swire Properties inter-company
and external debt) are expected to be strong.
Moody's understands that as the underlying debt at Swire matures,
refinancing -- if required -- would be at the Swire
Properties level. And if creditors at the Swire level are ever
considered inferior to creditors at the Swire Properties level by Moody's,
then Moody's would apply its standard notching policy. This
situation, however, is unlikely in the near term.
The stable outlook reflects financial prudence of Swire's management
and its track record thus far, such that its credit profile is expected
to remain consistent with the current rating level.
Upward rating pressure could emerge if there are no material changes to
Swire's business portfolio, or its business strategy,
such that the recurring contribution from its investment properties remain
a key profit and cash flow generator.
In addition, upward rating pressure would emerge should its liquidity
profile remain strong, FFO/debt surpasses 35%, and
FFO interest coverage exceeds 6x on a consistent basis.
On the other hand, aggressive capital investments or a significant
deterioration in the Hong Kong property market -- which weakens the
company's credit metrics, such that FFO/debt falls below 15-20%
and FFO interest coverage drops below 3x -- could exert
negative rating pressure.
Furthermore, downward rating pressure would emerge if 1) Swire's
business mix changes, such that its recurring property revenue streams
fall below 40-50% of consolidated EBIT; 2) its risk
exposure to Chinese property projects increases substantially; 3)
it has to provide funding support to its aviation businesses; and/or
4) structural subordination becomes applicable when material debt is raised
by Swire Properties.
Moody's last rating action with regard to Swire was taken on May 19,
2009 when the outlook on the A3 issuer and senior unsecured bond ratings
was changed to stable from positive.
The principal methodology used in rating Swire was Moody's Analytical
Considerations in Assessing Conglomerates, published in September
2007 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Swire Pacific Ltd, listed in Hong Kong, is engaged in property
investment and development, aviation, beverages, marine
services, and trading and industrial businesses. It is controlled
by a UK-based private company, John Swire & Sons Ltd,
which held 38.99% of its issued capital and 56.84%
of its voting rights as of December 31 2009.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
Moody's affirms Swire Pacific's ratings upon property spin-off plan
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
No Related Data.
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