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Ben Kwok

Cheung Kong and Hutchison's credit ratings have been lowered over 3G exposure

Tycoon Li Ka-shing's three main listed companies have been downgraded by credit ratings agency Standard & Poor's (S&P) because of the increasing debt and risks from his US$16.7 billion third-generation (3G) investment.

S&P yesterday lowered its rating on Hutchison Whampoa and associate Cheung Kong (Holdings) from A to A-minus. It is the lowest rating S&P has given the two blue-chip companies since 1995.

The agency also downgraded its outlook on Hutchison subsidiary Cheung Kong Infrastructure Holdings to negative from stable, while maintaining its negative outlook on the other two companies.

The downgrade comes after Hutchison issued US$3.5 billion in bonds this year, and a day after Hutchison sued Dutch firm KPN for not honouring a GBP150 million (HK$1.95 billion) cash call from  their British 3G joint venture.

In another development, KPN said yesterday Hutchison should buy back its stake in the venture at 140 per cent of an unspecified 'fair price'.

Hutchison and Cheung Kong said late last night the S&P rating was 'disappointing'.  They said the agency's negative outlook on the prospects of the 3G business did not warrant the ratings downgrade.

'Like all start-ups, our 3G business will incur start-up losses in early years. It is for this reason that we have ensured that these businesses are fully funded and adopted a prudent financial management policy minimising leverage in all our businesses and maintaining a high level of liquidity,' Hutchison said.

The company has HK$69 billion worth of bonds traded in the market. Its most recently issued 2013 bonds widened by about 10 basis points to 225 basis points above US treasuries on news of the downgrade.

Hutchison's exposure to the high-risk 3G business triggered the S&P decision to downgrade the Li group of companies because it believed the financial profile of the cash-rich conglomerate could be eroded.

S&P director John Bailey said: 'KPN, [the 3G] subscribers and marketing launch are the headline issues. At the end of the day, we'll look at their bottom line.

'The issue is about payback and return on equity, not about whether it [Hutchison 3G] works or it doesn't.'

S&P expressed concerns over Hutchison's slow subscriber take-up rate since the firm launched its high-speed mobile-data service in Britain and Italy in March.

Hutchison's subsidiaries have signed up 25,000 users in Britain and 100,000 in Italy, figures that put it a long way behind in achieving its ambitious target of securing a million subscribers in both markets by the end of the year.

S&P believed Hutchison's 3G venture would weaken the company's earnings outlook, while adding to its net debt levels. It said Hutchison, which had cash and liquid reserves of US$12 billion, had net debt-capital ratio of 24 per cent last year, compared with 2 per cent in 1999 when it sold mobile operator Orange.

However, Hutchison said its net debt-capital ratio had improved to 17 per cent, with cash and liquid investments of US$21 billion. It said it had also generated recurrent cash flow last year of $4 billion, which was enough to cover its requirements.

Analysts, however, were uncertain about how Hutchison could fill the earnings gap caused by the loss-making 3G business.

Meanwhile, Hutchison confirmed it had received a notice from KPN claiming the Hong Kong company had breached its shareholders' agreement by providing funding to their mobile-phone venture 3UK. It asked Hutchison to buy back its 15 per cent stake in the venture.

Hutchison said it did not consider KPN's notice to have any merit or substance.



S&P downgrades Li firms