Fitch Affirms Hysan Development Company at 'A-'; Rates Proposed Perpetual Securities 'BBB'

Hysan Development

24/02/2020 04:29

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-February 23: 

Fitch Ratings has affirmed Hong Kong-based Hysan Development Company Limited's 
(Hysan) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The 
Outlook is Stable. Fitch has also affirmed the senior unsecured ratings of Hysan 
and Hysan (MTN) Limited, and the USD2.5 billion MTN Programme issued by Hysan 
(MTN) Limited at 'A-'.

In addition, Fitch has assigned Elect Global Investments Limited's (Elect 
Global) proposed US dollar subordinated perpetual capital securities a 'BBB' 
rating and a 50% equity credit. The proposed perpetual securities are 
unconditionally and irrevocably guaranteed by Hysan.

The affirmation of Hysan's IDR is based on the stable performance of the 
company's Hong Kong investment-property (IP) portfolio and its prudent financial 
management, which is evident from its persistently low leverage and robust 
coverage ratio. Hysan has demonstrated gradual and stable revenue growth, 
positive rental reversion and high occupancy and resilience throughout 2019 
despite declining economic sentiment in Hong Kong. Although Fitch expects 
Hysan's performance to deteriorate in 2020, its financial metrics are likely to 
remain in line with its 'A-' rating.

Key Rating Drivers

Robust Recurring Rental Income: Fitch expects a moderate decline in rental 
income in 2020 as negative economic sentiment deepens in Hong Kong and dampens 
rental reversion and occupancy rates. Nevertheless, Fitch believes significant 
deterioration is unlikely as Hysan's mature IP portfolio has a diversified 
tenant base and a well spread-out lease maturity profile. 

Furthermore, Hysan's revenue increased in 2019 despite regular protests in 2H19, 
and the company achieved positive rental reversions for its office and retail 
portfolio in 2019. Its strategy to change its retail mix to cater to local 
demand, such as increasing food and beverage outlets, has mitigated the decrease 
in tourist arrivals. Meanwhile, Hysan has benefitted from companies moving away 
from Central district, as its office portfolio in Causeway Bay provides better 
connectivity to Central and more convenient transport options compared to other 
rising CBD areas.

Prudent Financial Management: Hysan's leverage, measured by net debt/investment 
portfolio value including its guarantee to its joint venture, remains low at 
around 5.5% for 2019 (1H19: 5.8%). These metrics compare favourably with those 
of Hong Kong peers. Fitch expects Hysan to maintain leverage at a low level. The 
company does not have secured borrowings on its balance sheet. Fixed debt 
remained stable, at 84% of its total borrowings at end-2019 (end-1H19: 80%). The 
company has also increased its maturity profile from 5.1 years at end-1H19 to 
6.6 years at end-2019. 

Diversified Tenant Base: Although Hysan's portfolio is concentrated in the 
Causeway Bay shopping district, the management has made effort to diversify its 
tenant base, with clear branding strategies for each retail property. For 
example, Hysan Place focuses on hip and trendy brands and FB, Lee Theatre 
concentrates on the mass market and traditional FB, while Lee Gardens target 
luxury brands. This positioning helps to expand the company's consumer base. 
Fitch believes management's efforts in this area add value to the assets' 
quality.

Hysan's has a balanced tenant mix for its office portfolio, with representation 
from banking and finance, consulting, insurance, co-working space, semi-retail, 
information technology and other industries. 

Continued Focus on IP: Fitch expects Hysan to continue to focus on its IP 
portfolio in Hong Kong. Hysan has a small residential development project in Tai 
Po with a joint venture partner, with pre-sales expected in 2021, and it is not 
expected to increase exposure in property development projects. Fitch expects 
Hysan to continue to evaluate IP opportunities in Hong Kong, but will maintain 
financial discipline if it acquires new IP projects.

Treatment of Perpetual Securities: The perpetual securities are rated two 
notches below Hysan's IDR in accordance with Fitch's Corporate Hybrids Treatment 
and Notching Criteria. This two-notch difference reflects the securities' coupon 
deferral feature and their subordination to senior obligations. The securities 
rank senior only to Hysan's share capital. 

Equity credit is typically assigned to instruments that are subordinated to 
senior debt and have an unconstrained ability for at least five years of 
consecutive coupon deferral. The securities qualify for 50% equity credit until 
year 5.5, as the issuer has full discretion to defer coupons until 10.5 years 
from the date of issue. Deferrals of coupon payments are cumulative. There is an 
option to redeem the perpetual securities three months before the first reset 
date 5.5 years from the date of issue. There will be a coupon step-up of 25 bp 
at the first step-up date at year 10.5, and an additional step-up of 75bp 15 
years thereafter. The perpetual notes have no legal maturity date and limited 
events of default. 

Derivation Summary

While Hysan's portfolio is more concentrated than Hong Kong peers, the company 
has maintained consistently positive rental reversion in its office portfolio 
and sustainably high occupancy rates in both the retail and office portfolios. 

Hysan's IP interest coverage of 10x in 2019 is the highest among Fitch-rated 
Hong Kong landlords, such as Link Real Estate Investment Trust (A/Stable), Sun 
Hung Kai Properties (A/Stable) and Swire Properties (A/Stable). The peers' 
interest coverage of peers ranged from 7x to 9x. Hysan's leverage, as measured 
by net debt / investment property value, of 5.5% at end-2019 is also lower than 
that of most peers.

Hysan's investment-property portfolio is larger than that of Nan Fung 
International Holdings Limited (BBB-/Stable), while Hysan has lower leverage and 
higher interest coverage than Nan Fung.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Rental reversion rates of -5% to -10% for office, -10% to -15% for retail in 
2020 and 2021;

- Occupancy rate of 96%-97% for office, 95% for retail and 85% for residential 
properties from 2020;

- Capex of around HKD1 billion per year to cover general maintenance capex;

- Property expense to turnover ratio at 14% 

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

- Fitch does not envisage any positive action in the next 12 to 18 months due to 
the deteriorating operating environment

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- Sustained deterioration of investment property EBITDA/gross interest coverage 
to below 4.0x (2019: 10x)

- Net debt/investment property asset exceeding 30% on a sustained basis (2019: 
5.5%)

- Net debt/recurring operating EBITDA exceeding 6x on a sustained basis (2019: 
1.4x)

- Change in business mix away from investment property

Liquidity and Debt Structure

Ample Liquidity, Financial Flexibility: The company's cash and bank balances 
(including time deposits) stood at HKD9.3 billion at end-2019, more than 
sufficient to cover short-term debt of HKD565 million. Hysan also maintained 
committed undrawn facilities of HKD3.3 billion at end-2019. The company's 
investment properties were valued at HKD79.1 billion in 2019, giving rise to 
additional financial flexibility. All of Hysan's borrowings are on an unsecured 
basis.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - 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 our ESG Relevance Scores, visit www.fitchratings.com/esg

Hysan Development Company Limited; Long Term Issuer Default Rating; Affirmed; 
A-; RO:Sta

----senior unsecured; Long Term Rating; Affirmed; A-

Hysan (MTN) Limited

----senior unsecured; Long Term Rating; Affirmed; A-

Elect Global Investments Limited

----subordinated; Long Term Rating; New Rating; BBB

Contacts: 

Primary Rating Analyst

Adrian Cheng, 

Director

+852 2263 9968

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Silvia Fun, CFA, CPA

Associate Director

+852 2263 9975

Committee Chairperson

Kalai Pillay, 

Managing Director

+65 6796 7221

 

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019)

https://www.fitchratings.com/site/re/10100477

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)

https://www.fitchratings.com/site/re/10090792

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10111852

Solicitation Status 

https://www.fitchratings.com/site/pr/10111852#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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