(The following was released by the rating agency)
-- Hong Kong-based property investment company IFC Development Ltd.'s "strong" business risk profile and "modest" financial risk profile support its stand-alone credit profile of 'a-'.
-- We are assigning our 'A' long-term corporate credit rating and our 'cnAA+' Greater China regional scale rating to IFC. We are also assigning our 'A' issue rating and 'cnAA+' Greater China regional scale rating to the proposed senior unsecured notes, which will be guaranteed by IFC.
-- The stable outlook reflects our expectation that IFC will generate stable cash flows and profitability while maintaining conservative financial management.
On Jan. 15, 2013, Standard & Poor's Ratings Services assigned its 'A' long-term corporate credit rating to Hong Kong-based property investment company IFC Development Ltd. (IFC). The outlook is stable. We also assigned our 'cnAA+' long-term Greater China regional scale rating to the company.
At the same time, we assigned our 'A' rating and 'cnAA+' Greater China regional scale rating to a proposed issue of senior unsecured notes by IFC Development (Corporate Treasury) Ltd., a special purpose vehicle set up to issue the notes. IFC will guarantee the notes. IFC will use the proceeds for refinancing of shareholder loans and other general corporate purposes. The issue rating is subject to our review of the final issuance documents.
The corporate credit rating reflects IFC's stand-alone credit profile of 'a-' and a one-notch uplift due to parental support. The rating also incorporates the strong asset quality and brand recognition of the company's single project, IFC Development, which generates stable cash flows underpinned by good rentals and occupancy. IFC's strong financial flexibility further supports the rating. The company's single-project risk, large exposure to the office property segment, which is more volatile than other segments, and shorter lease terms compared with global peers' temper the above strengths. We assess IFC's business risk profile as "strong" and its financial risk profile as "modest."
IFC's meaningful rental income to its shareholders makes it a key investment property for them, in our opinion. IFC's shareholders are Sun Hung Kai Properties Ltd. (A+/Negative/--; cnAAA/--; 50%); The Hong Kong and China Gas Co. Ltd. (A+/Stable/--; cnAAA/--; 15.8%); and Henderson Land Development Co. Ltd. (not rated; 34.2%). The three shareholders have extended shareholder loans to IFC and provided guarantees to project loans for the development during the construction stage; after the project's completion, the guarantees on the loans have been released. In analyzing IFC, we expect it to be a single-project company with a sole mandate to operate the IFC project.
We believe IFC benefits from its strong position in the commercial property market in Hong Kong. Although the company's single asset may be smaller in lettable area than the assets of other major Hong Kong peers, its asset value and average rentals are much higher than similarly rated peers'. IFC Development's location in the heart of Hong Kong's central business district results in higher rentals and occupancy. We expect this trend to continue given the limited supply of commercial space coming onstream in the central business district in the next three to four years.
Despite its prime location, IFC has single project risk--its key rating weakness, in our view. Nevertheless, we believe that the company's five properties, a big car park (the largest in the central business district), and its exposure to different market segments and the diversity of tenant base partly offset this risk. IFC's top 10 tenants account for approximately 50% of total lettable space in each of its office and retail segments. The company's hotel occupancy of above 85% is higher than the industry average. Demand for IFC's properties has remained strong, even during economic downcycles, reflecting their premium location and high asset quality.
We expect IFC's portfolio value to remain stable because the management intends to maintain the company as a single-asset vehicle for long-term investment. Our expectation also reflects the limited new supply of commercial property in the central business district, and this supports the current rentals. The management focuses on maintaining good asset quality to command higher rentals and yet keep tenant retention high. In our opinion, IFC's total debt is unlikely to increase. The management intends to maintain its ratio of debt to total asset value at below 35%.
In our base-case scenario, IFC's projected credit ratios will remain appropriate for its financial risk profile for the next 24 months. We expect the company's annual revenue growth rate to be in the single digits, its margins to stay stable, and total borrowings to remain unchanged. Occupancy at above 95% for office and retail spaces and neutral to modestly positive rental reversions will underpin an improvement in financial performance. IFC's profitability is good, with EBITDA margin above 65% in the past three years. We expect the company's free cash flows to remain strong at about Hong Kong dollar (HK$) 3 billion annually over the next two years. We forecast IFC's ratio of funds from operations (FFO) to debt to remain above 15% in fiscal 2013 (ending June 30) and fiscal 2014.
IFC's liquidity is "adequate," as defined by our criteria. We estimate that the company's liquidity sources will exceed its liquidity uses by more than 1.2x in fiscal 2013. Our liquidity assessment is based on the following major assumptions:
-- Liquidity sources include our FFO projection of about HK$2.6 billion.
-- Liquidity uses include our annual projected capital expenditure of about HK$70 million and dividend payments of HK$2.1 billion-HK$2.2 billion.
-- We expect IFC's net liquidity sources to remain positive and the company to remain well in compliance with its interest-coverage loan covenant even if its EBITDA declines by 15%.
IFC's funding needs are minimal because of its low capital expenditure requirements. The company has strong financial flexibility because it distributes dividends only after meeting its operating expenses. We believe that the company has ample headroom in the financial covenants stipulated in the bank loans for the next 12 months. The covenants include a ratio of loan to asset value of not exceeding 50% and EBITDA interest expense coverage of not less than 2x. As of June 30, 2012, IFC's loan-to-asset value ratio was 14.5% and EBITDA interest expense coverage was 18.7x. In our view, IFC has good banking relationships in Hong Kong due to the support of its shareholders. The shareholders have also stepped in and injected funds when needed, such as during the initial construction period and when loans were being refinanced.
The stable outlook reflects our expectation that IFC will maintain its leading market position and stable cash flows and profitability. We also expect the company's financial management to remain conservative.
We may lower the rating if the group's credit profile weakens due to a sustained deterioration in the commercial property market in Hong Kong, or if IFC deviates from its stated single-asset strategy and embarks on large and aggressive debt-funded acquisitions. Downgrade triggers could be the FFO-to-debt ratio weakening to less than 15% on a sustained basis and EBITDA interest coverage of below 4x. A material change in IFC's shareholding structure or a significant deterioration in the credit profiles of the company's key shareholders could also affect the rating.
An upgrade is unlikely over the next 12 to 24 months because of IFC's narrow geographic concentration and asset exposure. We may raise the rating if better profitability and stronger debt protection measures significantly improve the company's financial risk profile.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Key Credit Factors: Global Criteria for Rating Real Estate Companies, June 21, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
IFC Development Ltd.
Corporate Credit Rating A/Stable/--
Greater China Regional Scale cnAA+/--/--
IFC Development (Corporate Treasury) Ltd.
Senior Unsecured cnAA+
Senior Unsecured A