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Rating Action:

Moody's revises outlook on Swire Pacific's A3 ratings to stable

21 Jun 2018

Hong Kong, June 21, 2018 -- Moody's Investors Service has revised Swire Pacific Limited's rating outlook to stable from negative.

At the same time Moody's has affirmed the company's A3 senior unsecured bond ratings.

Moody's has also affirmed the following ratings, which are unconditionally and irrevocably guaranteed by Swire Pacific Limited: (1) the provisional (P)A3 senior unsecured MTN rating on Swire Pacific MTN Financing Limited's medium term note (MTN) program; and (2) the A3 senior unsecured ratings on the notes issued by Swire Pacific MTN Financing Limited pursuant to its MTN program.

The outlook for Swire Pacific MTN Financing Limited is also revised to stable from negative.

In addition, Moody's has affirmed the A2 issuer rating on Swire Properties Limited. The stable outlook on Swire Properties Limited and Swire Properties MTN Financing Limited remains unchanged.

Moody's has also affirmed the following ratings, which are unconditionally and irrevocably guaranteed by Swire Properties Limited: (1) the provisional (P)A2 senior unsecured MTN Rating on Swire Properties MTN Financing Limited's medium term note (MTN) program; and (2) the A2 senior unsecured ratings on the notes issued by Swire Properties MTN Financing Limited pursuant to its MTN program.

RATINGS RATIONALE

On 15 June 2018, Swire Properties Limited (A2 stable), a 82%-owned subsidiary of Swire Pacific, announced that it had entered into a sale and purchase agreement for the sale of Cityplaza Three and Four for a cash consideration of HKD15 billion, with HKD3 billion payable in 2018 and the remaining HKD12 billion in 2019.

"The change in outlook to stable primarily reflects our expectation that the majority of the sales proceeds will be used to pay down Swire Properties' debt, thereby lowering the leverage position of its parent, Swire Pacific, while the business operations of Swire Pacific's non-property segments will stabilize," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

Assuming most of the proceeds are used to pay down debt at Swire Properties, Moody's expects Swire Pacific's adjusted funds from operations (FFO)/debt will improve to 13.7% in 2018 and further to 17.8% in 2019 from 12.5% in 2017. This factor and an expected gradual improvement in Swire Pacific's aviation and marine services divisions will more than offset the decline in rental earnings due to the asset sales.

This level of leverage is consistent with the A3 rating category.

Moody's believes the asset disposal will not have a material effect on the earnings of Swire Properties and Swire Pacific, as rental income from these assets constituted only around 3%-5% of Swire Properties' total gross rental revenue and an even smaller portion of Swire Pacific's revenue in 2017.

Regarding Swire Pacific's non-property businesses, Moody's expects the recovery of commodity oil prices will modestly improve exploration and production demand, thereby narrowing losses in the marine services division. On the other hand, prospects of dividend payments from its 45%-owned affiliate of Cathay Pacific Airways Limited will improve, as fuel hedging losses will reduce and its three-year corporate transformation program is starting to show positive results.

On the other hand, Moody's expects Swire Pacific's other key profit drivers -- property and beverages -- will continue to benefit from a stable operational performance. Its property division, anchored by rental income from quality Grade-A office assets in Hong Kong and China, will also continue to see solid demand. The beverage business will benefit from moderate sales volume growth across China, Hong Kong and the US.

Swire Pacific's A3 rating continues to be supported by the core strengths of its subsidiary Swire Properties, which possesses a sizable portfolio of quality investment properties that generate robust and resilient gross rental income through the economic cycles. Swire Properties' strong credit quality helps mitigate the less stable performances of its other non-property businesses.

The rating also reflects the company's prudent management, long history and strong position in the Hong Kong property market, as well as a one-notch downward adjustment for structural subordination.

Similar to Swire Pacific, Moody's expects Swire Properties' adjusted debt/EBITDA will decline gradually to around 4.0x in 2018 and 3.1x in 2019 from 4.5x at the end of 2017. This level of leverage will solidly position the company at the A2 rating category.

Upward rating pressure on Swire Pacific could emerge if: (1) there are no material changes to Swire Pacific's business portfolio or strategy, such that its investment properties remain key contributors of profit and cash flow through recurring income; (2) liquidity remains strong; (3) FFO/debt exceeds 30%; and (4) EBITDA interest coverage exceeds 7.0x-7.5x on a sustained basis.

On the other hand, the ratings could be lowered, if: (1) Swire Pacific's business mix changes, such that its recurring property revenue streams fall below 50% of consolidated EBIT; (2) Swire Pacific makes aggressive capital investments; (3) Swire Pacific provides funding support to its 45%-owned affiliate Cathay Pacific; or (4) Swire Properties' performance deteriorates significantly.

Specifically, Moody's would consider a downgrade if FFO/debt falls below 15% or EBITDA interest coverage falls below 5.0x-5.5x on a sustained basis. A downgrade of Swire Properties' rating could also trigger a downgrade of Swire Pacific's rating.

Upward rating pressure on Swire Properties would emerge if Swire Pacific's rating is upgraded and earnings from Swire Properties' investment property business continue to grow, thereby reducing the volatility arising from the company's property development activities. 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' rating could emerge if the company increases its property development activities or engages in material investments that are substantially debt funded, which would impair the company's 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's rating could also be negative for 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 Rating Methodologies 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. As of the end of 2017, its investment and trading property portfolios had attributable gross floor areas (GFAs) of 26.6 million square feet (sq ft) and 2.6 million sq ft, respectively.

Swire Pacific Limited is engaged in the property investment, property development, aviation, beverages, marine services, and trading & industrial businesses. The company operates mainly in Hong Kong, China, Taiwan, Singapore and the US, through various subsidiaries, joint ventures (JVs) and associates. In 2017, the company reported revenue of HKD80.3 billion.

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 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.

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.

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

Gary Lau
MD - Corporate Finance
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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