Fitch Ratings has affirmed Hong Kong-based Swire Pacific Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'.
The Outlook is Stable. Fitch has also affirmed Swire Pacific's foreign-currency senior unsecured rating and the ratings on the medium-term note programme and issues from its subsidiary, Swire Pacific MTN Financing (HK) Limited, at 'A-'.
The affirmation reflects our expectation that recurring EBITDA interest coverage will remain healthy, despite rising funding costs, supported by stable rental income from its high-quality investment property (IP) portfolio in Hong Kong and China and the rising EBITDA contribution from its beverage business.
Key Rating Drivers
Healthy Coverage, Despite Higher Funding Costs: Funding costs are likely to rise over the next two years as maturing debt is refinanced at higher cost. However, we expect the increase to be gradual, as Swire Pacific mainly uses fixed-rate debt and has a spread out maturity profile. Our rating case assumes average funding costs of 3.7% in 2023, up from 3.2% in 2021, leading us to forecast recurring EBITDA interest coverage to decline to 5.4x by 2023 (2021: 6.2x). This is still above our negative rating trigger.
Leverage to Rise From Low Level: We expect Swire Pacific's leverage to rise in the next few years due to its capital investments and shareholder-friendly activities. Higher investment outflows than we forecast could pressure the group's financial profile.
Swire Pacific's 82%-owned subsidiary, Swire Properties Limited (A/Stable), plans to invest over HKD100 billion in the next decade, while Swire Pacific announced in July 2022 the acquisition of Coca-Cola's bottling operations in Vietnam and Cambodia for USD1.0 billion. It also announced a 15% increase in its dividend and a HKD4 billion share buyback programme at its interim results.
Resilient Property EBITDA: Swire Properties' high-quality IP portfolio and strong recurring rental income will continue to be the main factor supporting Swire Pacific's credit profile, contributing over half of the group's EBITDA. We expect stable rental income in 2022, after a flat yoy result in 1H22, rising by mid-single digits in 2023 as the company completes new properties, such as Two Taikoo Place.
Beverage Expansion Through M&A: We expect the acquisition of Coca-Cola's bottling operations to lift beverage EBITDA by around 15% in 2023. Consolidated EBITDA should also rise after the company agreed to restructure a bottling associate in China, whereby it will exchange a 41% stake in 11 cities for a 100% stake in six cities. This will follow a 6% decline in beverage EBITDA in 2022, narrowing from negative 10% in 1H22, with a sales volume recovery in mainland China and Hong Kong in the absence of further Covid-19 pandemic-related related travel restrictions.
We expect the EBITDA margin to stabilise in 2H22. The margin on the beverage business has historically been stable due to the company's ability to pass on cost inflation through price increases and by adjusting its product mix.
Cathay Pacific to Recover: We believe the risk of further capital injections into Swire Pacific's 45% owned subsidiary, Cathay Pacific Group, is low given its liquidity position; it had HKD17.3 billion of liquid funds and HKD9.5 billion of committed undrawn facilities as of 1H22 and we expect its narrowing monthly cash burn, which totalled less than HKD100 million in 1H22, to turn positive in 2H22. However, we do not expect a dividend contribution before Cathay Pacific redeems the preference shares issued to the Hong Kong government.
Higher Negative Threshold on Recurring EBITDA: We include beverage EBITDA in our recurring EBITDA calculation, along with IP EBITDA, given the stable nature of beverage consumption and steady margin. We also believe the risk profile of Swire Pacific's non-property businesses has reduced, with our expectation of a recovery in the aviation business and the disposal of the marine services business. The inclusion of beverage EBITDA lifts the negative threshold for recurring EBITDA interest coverage to 4.5x, from 3.0x, to reflect the higher business risk of the beverage business relative to the IP business.
Derivation Summary
Swire Pacific's credit profile is supported by its 82% stake in Swire Properties. Swire Properties is well-positioned among Hong Kong landlord peers rated in the 'A' category. Its IP portfolio primarily consists of Grade A offices and shopping malls in prime locations of Hong Kong and key cities in China, with high occupancy rates. Its IP value of around USD34 billion and IP EBITDA of around USD1.0 billion are lower than Sun Hung Kai Properties Limited's (A/Stable) USD50 billion and USD2.0 billion, respectively, but similar to that of Link Real Estate Investment Trust (A/Stable).
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Attributable rental income to increase by 1% in 2022 and 4% in 2023 (flat in 1H22)
Beverage EBITDA to decline by 6% in 2022 (10% decline in 1H22), then rise by 20% in 2023, driven by the bottling acquisition in Vietnam and Cambodia and restructuring in China.
HKD10 billion in annual property capex, including investments in property trading; HKD23 billion in total capex in 2022, including acquisition of bottling business, and HKD14 billion in 2023
HKD4 billion in share buybacks spread over 2022 and 2023
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
We do not envisage positive rating action within the next 12-18 months due to the company's large capital investment plan.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Decline of Swire Pacific's shareholding in Swire Properties
Recurring EBITDA/gross interest expense falling to below 4.5x for a sustained period
Further capital injections into Cathay Pacific, increasing its importance in Swire Pacific's business profile
Heightened execution and financial risk due to larger than expected investments at Swire Properties
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Ample liquidity: Swire Pacific had HKD13.6 billion of cash and HKD25.5 billion of committed undrawn facilities in 1H22, sufficient to cover HKD9.0 billion of short-term debt.
Issuer Profile
Swire Pacific is a Hong Kong-based property-centric conglomerate. It owns a high-quality IP portfolio in prime locations across Hong Kong and key cities of mainland China through Swire Properties, which contributes stable rental income. The company is also involved in other industries, including beverages and aviation.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
SWIRE PACIFIC LIMITED 
