Wharf slides as S&P cuts rating over cash flow

Wharf Holdings' fortunes were buffeted further yesterday when United States agency Standard & Poor's cut the company's debt rating to reflect weakening cash flow.

The agency cut Wharf's long-term rating from A minus to BBB plus, took the company off CreditWatch, and left its ratings outlook as negative.

S&P said the rating change reflected slower than expected progress in Wharf's loss-making communications businesses, and declines in the Hong Kong property market.

The agency said the 'deterioration in the operating environment and the general economic slowdown have impacted on Wharf's historically conservative financial profile'.

Wharf shares slumped as much as 4.5 per cent in early trading as investors responded to the rating cut with a selling spree.

The stock later recovered some of its losses but still ended the day 2.7 per cent down at $10.70, even as the Hang Seng Index ended the day with slight gains.

Analysts said the rating cut had been expected as the market had already been pricing in the effect of the property slide on Wharf's balance sheet and gearing levels.

Paribas Asia Equity property analyst Andrew Taylor said: 'The picture for the company is looking less promising all round.' Wharf normally has a policy of refusing to comment on credit rating changes but corporate affairs head Gary Shing said the latest change mainly reflected the poor economic conditions in Hong Kong.

He said the group was glad it had been removed from CreditWatch, where they had been placed in February this year.

S&P said the development of Wharf's cable and telecommunications businesses had been slower than expected because of heavy competition and weak demand.

The agency said the build-out of the businesses had created an aggregate $7.7 billion cash outflow over the five years to 1997, significantly increasing Wharf's debt burden.

S&P said the cable television service had achieved cash flow break-even early this year but 'the timing and level of return from these businesses remain uncertain'.

The agency ended by saying Wharf's management had indicated its determination to reduce company debt levels. This should help improve financial ratios by next year.