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David Evans

Swire Pacific expressed surprise and dismay after Standard & Poor's (S&P) said it might downgrade the conglomerate's corporate credit rating.

The United States-based rating agency yesterday said it was placing Swire's A-minus rating on CreditWatch over fears its property investment portfolio would hold back its ability to improve cash flows.

'Although industry fundamentals have started to improve, it is expected to take some time before they translate into significantly higher earnings,' S&P said.

Analysts also expressed surprise over the timing of the decision, saying the rental property market had bottomed some time ago and was on an upswing.

S&P said Swire - which has interests in real estate, aviation and soft drink bottling  - had seen profits from its property business fall 40 per cent since 1997.

The group's earnings before interest, taxes, depreciation and amortisation were only enough to cover its interest payments three times over last year, compared with 6.8 times in 1997, it said.

The agency said rent reviews and relettings were still being negotiated at rates substantially lower than the highs seen in 1997, and margins in the trading portfolio were relatively low.

S&P said Swire's cash-flow protection had also eroded, with funds from operations accounting for less than 20 per cent of debts last year, compared with 53.8 per cent in 1997.

Offsetting some of the weakness had been a significant increase in dividend income from the group's investment in Cathay, it said.

Placing Swire on CreditWatch with negative implications will make it more expensive for the company to raise money by selling bonds.

Analysts said the possibility of a downgrade could affect the group's ability to raise funds from the capital markets and ultimately reduce its investment flexibility.

Swire Pacific finance director Martin Cubbon expressed concern at the decision and said the company would meet S&P to discuss the issue. Swire would discuss its financial plans and present expectations for future performance.

'We are very surprised by S&P's decision given the improving business outlook for our core businesses, and the fact that our essential financial ratios are now back at levels similar to those seen when our A rating was first awarded in 1994,' he said.

S&P said the environment in the airline industry - Swire has a 45 per cent interest in Cathay Pacific Airways - remained 'challenging'. It also said Swire's capital position was conservative, with net debt of HK$16.9 billion at the end of last year, or 23 per cent of group capital.

Analysts said S&P's decision was surprising as Hong Kong's property rental market was showing signs of recovery.

'The property market is one of the most stable businesses in Hong Kong at the moment. They should look at upgrading the company,' said K Y Ng, research vice-president at G K Goh Securities.

According to one analyst, rents were moving up sharply.

'Why is S&P doing it now? I could understand if it was two years ago,' he said. 'It is absolutely ridiculous.' Swire shares gained 30 HK cents to close at HK$45 yesterday, buoyed partly by a 3.6 per cent rise in Cathay Pacific shares.

They rose 50 HK cents to HK$14.40 on the back of an improved profit-growth forecast.



Swire Pacific receives S&P jolt