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Rating Action:

Moody's affirms Swire Properties' A2 ratings; outlook stable

 The document has been translated in other languages

29 Oct 2015

Note:on November 2, 2015, the press release was corrected as follows: The second paragraph was amended and now reads as follows: Moody's has also affirmed the A2 senior unsecured ratings and the (P)A2 rating on the senior unsecured MTN program for Swire Properties MTN Financing Limited, a wholly-owned subsidiary of Swire Properties Limited, whose rated debt and MTN program benefit from an unconditional and irrevocable guarantee by Swire Properties Limited. Revised release follows.

Hong Kong, October 29, 2015 -- Moody's Investors Service has affirmed the A2 issuer rating of Swire Properties Limited.

Moody's has also affirmed the A2 senior unsecured ratings and the (P)A2 rating on the senior unsecured MTN program for Swire Properties MTN Financing Limited, a wholly-owned subsidiary of Swire Properties Limited, whose rated debt and MTN program benefit from an unconditional and irrevocable guarantee by Swire Properties Limited.

The ratings outlook remains stable.

RATINGS RATIONALE

"Swire Properties' A2 issuer rating primarily recognizes its quality retail and office investment assets in Hong Kong, which have demonstrated resilience through economic cycles, and generate strong and recurring cash flows," says Joe Morrison, a Moody's Vice President and Senior Credit Officer.

"The rating also considers an expected increase in its financial leverage to support the large amount of capital expenditure and a softening in its retail business in Hong Kong. However, we expect the degree of weakening in its financial metrics to be moderate," adds Morrison.

The anti-corruption campaigns in Mainland China as well as a slowdown in overall tourist flows from the Mainland will continue to negatively affect the retail sales of luxury goods in Hong Kong.

Nonetheless, the impact on Swire Properties should be manageable, given that the majority of its rental income is generated from its stable office properties. In addition, its retail portfolio in Hong Kong has shown resilience, as evidenced by the 1.4% year-on-year growth in the gross rental income from its Hong Kong retail portfolio in 1H 2015.

The company's office portfolio in Hong Kong continues to achieve strong results, as evidenced by the 6.5% year-on-year growth in gross rental income and maintenance of very high occupancy rates in 1H 2015.

Swire Properties' rating also takes into account the company's growing rental income from investment properties in Mainland China, which raise its business risk and cash flow volatility. This business represented 18.8% of the company's total gross rental income in 1H 2015 and its contribution has more than doubled over the past three years.

Moody's forecasts that Swire Properties' leverage levels -- as measured by adjusted debt/EBITDA -- will rise to 4.5x-4.7x over the next 18 months, from 4.1x for the 12 months ended June 2015, mainly because of its sizeable capital commitments and slowing growth in rental income. Similarly, its EBITDA/interest coverage should decline to around 5.5x during the same period, from 6.3x for the 12 months ended June 2015.

Nevertheless, these ratios will still position the company at the A2 level.

While Swire Properties' property trading business exposes the company to some volatility in terms of revenues and profits, Moody's believes that these risks are manageable, given that its property trading business will remain relatively small compared with its investment property portfolio.

The stable rating outlook reflects Moody's expectation that Swire Properties will maintain its prudent approach in its operations and financial management. In particular, Moody's believes that it will continue adopting a cautious expansion strategy, and that its financial profile will remain in line with the parameters of an A2 rating level.

Upward rating pressure will be limited in the near term, given its expansion in Mainland China, and its close linkage with its parent, Swire Pacific Limited (A3 stable).

However, if Swire Pacific is upgraded and earnings from Swire Properties' investment property business continue to grow -- thereby reducing the volatility arising from its property development activities -- Swire Properties' ratings could be upgraded. The financial indicators that Moody's would consider for an upgrade include adjusted debt/EBITDA below 3.0x and EBITDA interest coverage exceeding 6.5x-7.0x on a sustained basis.

Downward pressure on Swire Properties' ratings could emerge if the company increases its property development activities or engages in material investments that are funded substantially by debt, and which would impair its financial profile, such that adjusted debt/EBITDA exceeds 5.0x-5.5x and EBITDA interest coverage falls below 5.0x on a sustained basis.

A downgrade of Swire Pacific could also trigger a downgrade of Swire Properties' rating.

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Founded in 1972, Swire Properties Limited is a leading developer, owner and operator of mixed-use, principally commercial properties in Hong Kong and Mainland China. The company also develops premium residential properties in Hong Kong. As of June 2015, its investment and trading property portfolios had an attributable gross floor area of 27.3 million square feet and 4 million square feet respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Joe Morrison
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms Swire Properties' A2 ratings; outlook stable
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