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Rating Action:

Moody's assigns A2 rating to WREIC's USD MTN drawdown

27 Apr 2020

Hong Kong, April 27, 2020 -- Moody's Investors Service has assigned an A2 rating to the proposed USD senior unsecured notes to be issued by Wharf REIC Finance (BVI) Limited, a wholly-owned financing subsidiary of Wharf Real Estate Investment Company Limited (WREIC, A2 stable), based on the irrevocable and unconditional guarantee of WREIC. The notes will be issued under Wharf REIC Finance (BVI) Limited's USD3 billion guaranteed medium-term note (MTN) program that is rated (P)A2.

The rating outlook remains stable.

WREIC plans to use the proceeds of the bonds for general corporate purposes.

RATINGS RATIONALE

"WREIC's A2 issuer rating reflects the company's sizable and good-quality assets located in prime commercial locations in Hong Kong, as well as its long operational track record throughout the economic cycles," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

At the same time, the rating is constrained by WREIC's high revenue and asset concentration in a single property -- Harbour City -- in Hong Kong, the retail performance of which is exposed to volatile tourist inflows from mainland China. This concentration risk is partly mitigated by the company's broad tenant base.

WREIC proactively manages its leases to minimize the risk of a material decline in occupancy rates. Thanks to this approach the company maintained relatively high occupancy rates even through Hong Kong's economic downturn following the 2008-09 global financial crisis.

Moody's forecasts that the company's adjusted net debt/EBITDA will weaken to 3.8x-4.6x in the next 12-18 months from 3.4x in 2019. Likewise, its EBITDA/interest coverage will decline to 7.3x-8.6x from 13.3x over the same period. Still, these ratios appropriately position the company in the A2 rating category.

These projected credit metrics assume a 25%-30% revenue decline to HKD11.5 billion in 2020 from HKD16 billion in 2019, and a subsequent recovery to around HKD14 billion in 2021. These assumptions reflect lower turnover rent, retail rental concessions and negative rental reversions as well as a sharp drop in hotel income caused by significant weakening in Hong Kong retail sales and tourist arrivals in 2020 amid the coronavirus outbreak.

Moody's also expects the company's adjusted debt to increase to around HKD50 billion over the next 12-18 months from HKD47 billion as of December 2019, after accounting for annual capital spending of HKD2.5 billion-HKD3.0 billion for the next 12-18 months, and potential new project investments.

On 24 April 2020, WREIC issued a profit warning on the Hong Kong Stock Exchange regarding an expected loss for the six months ending 30 June 2020, due to a likely unrealised revaluation deficit of the company's investment properties and hotels. While this development is credit negative because of its adverse effect on its capitalization, it will have no material impact on the company's overall credit quality. The charges are non-cash items and its strong capitalization affords the company an ability to absorb such impact without hampering its capital structure.

In terms of environmental, social and governance (ESG) factors, the rating factors in the concentration of WREIC's ownership in its parent, Wheelock and Company Limited, which is effectively controlled by the Wu family. This factor is balanced by the prudent financial policies of both the company and the parent company over the years.

The stable rating outlook reflects Moody's expectation that WREIC will maintain its (1) quality asset portfolio; (2) predictable and strong rental revenue and high occupancy levels for its key assets; and (3) healthy debt leverage.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Moody's could upgrade the rating if the company (1) diversifies in terms of geographies and asset types, without increasing business and financial risk; (2) reduces concentration risk in revenue contributions from its key assets; (3) increases the duration of its lease coverage to increase its buffer against a potential economic downturn; or (4) improves its credit metrics, such that its adjusted net debt/EBITDA falls below 2.5x on a sustained basis.

WREIC's rating could be downgraded if Harbour City's operations and occupancy deteriorate significantly. Downgrade pressure will also increase if the company aggressively accelerates its property development activities, or undertakes property acquisitions or material capital distributions, leading to a significant deterioration in its liquidity position or credit metrics.

Financial indicators that Moody's would consider for a downgrade include adjusted net debt/EBITDA rising above 5.5x or debt/total assets exceeding 25%-30% on a consistent basis. In addition, any material change in WREIC's ownership by its key shareholder would be negative for the rating.

The principal methodology used in this rating was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Wharf Real Estate Investment Company Limited (WREIC) was created in November 2017 through the spinoff of six Hong Kong investment property assets of Wharf (Holdings) Ltd. As of 31 December 2019, WREIC held a portfolio consisting of six quality commercial properties in Hong Kong, with an aggregate gross floor area of 11.7 million square feet (sq ft), valued at HKD267.6 billion ($34.3 billion) as of the end of December 2019. In 2019, the company's total gross revenue was HKD16.0 billion ($2.1 billion).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Stephanie Lau
Vice President - Senior Analyst
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
Client Service: 852 3551 3077

Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
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