Rating Action: Moody's assigns A3 rating to Hysan's proposed perpetual securities
Global Credit Research - 17 Aug 2020
Hong Kong, August 17, 2020 -- Moody's Investors Service has assigned an A3 rating to the proposed senior unsecured perpetual securities to be issued by Elect Global Investments Limited and irrevocably and unconditionally guaranteed by Hysan Development Co., Ltd. (A3 stable).
The outlook remains stable.
The proceeds from the securities will be used for general corporate purposes.
RATINGS RATIONALE
"The A3 rating primarily reflects Hysan's stable recurring income and high profitability, underpinned by its high-quality investment properties in Hong Kong SAR's prime shopping district of Causeway Bay. These factors mitigate the group's high geographic concentration and moderate scale," says Stephanie Lau, a Moody's Vice President and Senior Analyst.
The rating also recognizes the company's prudent financial management, which has underpinned its low debt leverage and excellent liquidity over the years.
Moody's expects that without any large-scale investments, Hysan's adjusted net debt/EBITDA will rise slightly to 0.9x in the next 12-18 months from 0.8x for the 12 months ended June 2020. Its adjusted EBITDA/interest will decline to around 5.5x from 7.4x over the same period.
These ratios are solid for its A3 rating and provide adequate cushions against potential investments. The company is also preparing funding for potential investment opportunities and other initiatives.
These forecasts reflect Moody's assumptions that rental reversions in Hysan's office portfolio will turn slightly negative and retail rental concessions will persist into the second half of 2020, as the coronavirus-induced economic downturn continues to challenge the company's leasing operations.
"The A3 rating also reflects the senior unsecured nature of these securities, given that these securities will rank pari passu with all other present and future unsubordinated and unsecured obligations of the issuer and guarantor," adds Lau.
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, and has therefore not notched down the rating.
However, Moody's could lower rating on the securities-- relative to Hysan's issuer rating -- if the 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.
Hysan's ratings also take into account the following environmental, social and governance (ESG) factors. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Hysan is also exposed to the change in consumer preference toward online shopping, which could pressure retail sales at the company's physical retail space. This risk is mitigated by Hysan's more balanced exposure between the retail and Grade-A office segments, and the slow penetration of online shopping in Hong Kong.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook reflects Moody's expectation that Hysan will continue its conservative approach toward expansion. Specifically, Moody's expects Hysan will maintain its solid operating performance and financial metrics, supported by recurring rental income from a high-quality portfolio of investment properties.
Moody's could upgrade the ratings if the company (1) further enhances its scale and asset quality, while lowering its geographic concentration; (2) maintains its strong liquidity profile, with cash and committed bank facilities that are more than able to cover its short-term debt and committed capital spending; and (3) maintains strong credit metrics, with its adjusted net debt/EBITDA staying below 2.5x-3.0x.
On the other hand, Moody's could downgrade the ratings if (1) a significant downturn in the Hong Kong retail environment affects Hysan's stable operations and occupancy; and/or (2) the company carries out aggressive debt-funded expansion, such that its net debt/EBITDA exceeds 5.5x-6.0x.
The principal methodology used in this rating was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Hysan Development Co., Ltd. invests in commercial and residential properties in Hong Kong and is one of the largest commercial landlords in the territory's Causeway Bay district. As of December 2019, the Hong Kong Stock Exchange-listed company was 41%-owned by Lee Hysan Company Limited, which is controlled by the founding family of Mr Lee Hysan.
REGULATORY DISCLOSURES
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.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
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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