Swire Pacific has preserved financial buffers for a difficult 2020: S&P

March 13, 2020

HONG KONG -- S&P Global Ratings said today that Swire Pacific Ltd. (A-/Stable/-) had built up greater balance sheet flexibility to weather increasing macro uncertainties in the coming year. This should support the company's credit standing, but its financial cushion would be compressed over the next 12 months, the agency said.

Swire's property income in Hong Kong, together with earnings from its significant holding in Cathay Pacific have been impacted by social unrest in Hong Kong and the coronavirus.

"Swire's debt reduction for the year ended December 31, 2019 was above our expectation," S&P said.

"After making adjustments for accessible cash, we estimate Swire's adjusted debt fell to about HK$60 billion at end-2019, from about HK$73 billion in 2018, largely due to debt repayments and cash proceeds collected from asset sales.

"Financial leverage, as measured by the company's ratio of debt to EBITDA, improved to about 3.6x from 4.4x in 2018. This compares with our downgrade trigger of 4.5x, and gives the company improved rating headroom against external uncertainties.

"These include the ongoing COVID-19 outbreak, global economic headwinds, and social unrest in Hong Kong."

However, S&P said that, in its opinion, the financial buffer accumulated in the past two years would be largely consumed over the year.

"We anticipate an extended decline in Swire's rental income from retail property in Hong Kong over the next six months, S&P said.

"This comes on the back of a 12% year-on-year decline in such rents during 2019 to HK$2.4 billion, related to a plunge in tourist arrivals and tepid discretionary spending amid social unrest.

"The Hong Kong retail portfolio accounted for about 20% of Swire's total gross rental income in 2019, down from 22% in 2018.

"Difficult conditions for the Marine Services business, and likely substantial loss at its aviation associate, Cathay Pacific, in 2020, further compounds the situation. We don't expect meaningful dividend upstream from Cathay over the coming two years."

S&P said it believed Swire would uphold disciplined financial management to mitigate cash flow pressure.

This could include a cautious dividend policy, potential asset recycling, and rescheduling of some capital investment plans, particularly in the property and beverage segments.

"In addition, the company has undrawn committed facilities of about HK$19 billion at the end of 2019, HK$9.3 billion of which expires beyond 2020," S&P said.

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