US rating agency Standard & Poor's (S&P) has placed two notes issued by Sino Group's unit Pacific Palisades Funding on credit watch. A US$98.8 million floating-rate note and GBP22.5 million (about HK$282.8 million) fixed-rate note are rated at BBB and are due in November 2001. A spokesman for S&P said the agency was studying the negative factors and might downgrade the ratings if the situation deteriorated. Pacific Palisades Funding launched the two asset-backed bond issues in November 1996 by securitising the rental income from the Pacific Palisades residential development in North Point, which has 425 luxury flats. The listed arm, Sino Land, owns a 20 per cent interest in the development, with the balance owned by the family of Sino chairman Robert Ng Chee Siong. The agency said the credit-watch rating was the result of weaker forecast cash flows from Pacific Palisades. The interest coverage has dropped significantly since the credit raising and cash-flow coverage has been below or only marginally above the cash trap trigger of 1.45 times for several quarters. The property's preferred tenant base - Japanese expatriates who favour the location for its proximity to Japanese schools and shops - had shrunk, the agency said. Rental, car-park and fee revenues from Pacific Palisades are expected to drop to meet tough market conditions, which include moderate new supply in the next two years and a changing tenant base. Also, approximately 70 units had been withdrawn for refurbishment, which had led to higher vacancies, the agency said. A source from Sino Group said leasing activity had picked up because more units had completed refurbishment. He said the vacancy rate had dropped and was expected to continue falling. S&P said the refurbishment should enhance leasing activity in the medium term. The refurbished units should lease out at higher rents and ease the pressure of rent reversion. The rating agency said that with completion of the refurbishment programme and reductions in vacancies, the interest coverage should improve gradually from 1.24 times at present to 1.3. The next two quarters would be very important and the agency would review its rating if the expected improvement was not realised, it said. RATINGS
