Rating Action: Moody's assigns A2 rating to CK Asset's guaranteed senior perpetual securities
Global Credit Research - 03 Sep 2020
Hong Kong, September 03, 2020 -- Moody's Investors Service has assigned an A2 rating to the proposed senior unsecured perpetual securities to be issued by Panther Ventures Limited and irrevocably and unconditionally guaranteed by CK Asset Holdings Limited (CKA) (A2 stable).
The outlook is stable.
The proceeds from the securities will be used for the general corporate purposes of CKA and its subsidiaries, including redemption of outstanding perpetual securities.
"The A2 rating primarily reflects CKA's established market position in Hong Kong and mainland China, which mitigates development risks and volatility associated with development revenue recognition. The A2 rating also reflects the relatively stable and diversified recurring income stream from its investment properties and from its portfolio of mature assets, comprising aircraft leasing, utilities and power in developed markets," says Stephanie Lau, a Moody's Vice President and Senior Analyst.
The rating also recognizes the company's prudent financial management, which mitigates the event and execution risks associated with its opportunistic acquisitions outside the property business.
Moody's expects CKA's adjusted net debt/net total capitalization to improve to 12% in the next 12-18 months from 14.3% at 30 June 2020. This expectation is driven by lower net debt, without any further acquisitions. This level of leverage supports its A2 rating and provides a sufficient buffer against potential acquisitions or external shocks.
These forecasts reflect Moody's assumption that CKA's adjusted net debt, after the pro-rata consolidation of joint ventures, will decline to around HKD55 billion-HKD60 billion in the next 12-18 months from HKD70 billion as of June 2020, as the company's weaker but still-sizable recurring cash flow will allow it to generate positive free cash flow.
On the other hand, CKA's earnings will decline significantly in 2020, before rebounding moderately in 2021 mainly because of weakness in the property rental, hotel, aircraft leasing businesses and pub operations in the UK amid the coronavirus-led disruptions and economic downturn.
The proposed issuance will not materially change CKA's credit metrics, because it plans to use the proceeds mainly to refinance its existing perpetual securities.
The A2 rating on the proposed senior perpetual securities also reflects the fact that the securities will rank pari passu with all other present and future unsubordinated and unsecured obligations of the issuer and guarantor.
While the proposed guaranteed perpetual securities have hybrid-like features, with the option of deferred coupons on a cumulative and compounding basis, Moody's considers them as 100% debt-like securities as they have a dividend suspension clause that creates an incentive for the company to service the coupon. Moody's has therefore not notched down the rating.
However, Moody's could lower the rating on the securities -- relative to CKA's issuer rating -- if debt with deferral features becomes a substantial portion of its capital structure, or if Moody's believes that the company will likely defer many payments in advance of a default.
CKA's ratings also take into consideration the company's growing appetite for acquisitions and its ownership concentration in the Li family. These factors are balanced by the company's prudent financial policy and maintenance of a healthy financial profile over the years.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook reflects Moody's expectation that CKA will maintain its prudent approach to financial management, stable income from its investment properties and hotels, and strong liquidity.
Moody's could upgrade the ratings if the company (1) increases its stable income streams and its coverage ratio on interest expenses; (2) increases its geographic diversification to reduce its high reliance on the Chinese property market, where competition is strong and regulatory risk is high and (3) maintains a strong liquidity profile.
On the other hand, Moody's could downgrade the ratings if (1) CKA becomes less prudent in its financial management, thereby weakening its liquidity position or raising its debt leverage, with adjusted net debt/net total capitalization exceeding 20%; (2) its non-property development EBIT/interest falls below 3.0x-3.5x or (3) it invests in substantial non-property investments that carry high risks, thereby raising business and financial risks.
The principal methodology used in this rating was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
CK Asset Holdings Limited has a leading market position and a long track record in property development and investment in Hong Kong and mainland China. CKA develops, invests and manages properties across various asset classes, including residential, office, retail, industrial, car park and hotel properties.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Stephanie Lau Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Chris Park Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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