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May 22 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Hong Kong-based Nan Fung International Holdings Limited’s (Nan Fung; BBB/Stable) proposed US dollar notes an expected rating of ‘BBB(EXP)'. The proposed notes will be issued by Nan Fung Treasury Limited, a wholly owned subsidiary of Nan Fung. The notes are unconditionally and irrevocably guaranteed by Nan Fung.
The bonds are rated at the same level as Nan Fung’s Issuer Default Rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is contingent on the receipt of final documents conforming to information already received.
Established Market Position: Nan Fung has 49 years of experience in developing residential and commercial properties in Hong Kong. The company has demonstrated the ability to come through economic cycles, aided by its strong capital structure that allows operational flexibility in terms of the timing of investments. Nan Fung’s prudence is reflected in its highly liquid financial profile, low financial leverage and investment property portfolio that has been funded mainly via internally generated funds.
Sufficient Interest Coverage: Nan Fung’s stable recurring income streams are generated from its investments in investment property, financial investments and hotel operations. Fitch expects these segments to generate HKD1.4bn-1.6bn in recurring EBITDA per annum over the next three years. The company’s recurring income interest coverage is expected to stay above 2.5x (2.39x at end-March 2013), which still supports its rating level.
Smaller Operating Scale: Nan Fung’s investment property portfolio is small, in terms of absolute asset size as well as percentage contribution to income, compared with its higher-rated property peers. This weakness constrains its rating. Its property portfolio amounted to 2.5 million square feet in Hong Kong and 1.3 million square feet in China at 31 March 2013 (2.02 million square feet in total at 31 March 2012).
Ample Liquidity: The company had unpledged cash of HKD9.6bn at end-September 2013, and diversified and sizable liquid financial assets valued at HKD17.7bn at end-March 2013. This is compared with debts of HKD17.0bn at end-September 2013. Fitch expects Nan Fung’s liquidity will remain robust, after factoring in the company’s development expenditures and capex over the medium term.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- sustained poor execution of Nan Fung’s property development projects
- significant weakness in both Hong Kong and China property markets leading to substantial decline in property prices
- Nan Fung’s recurring EBITDA (investment property, dividend and coupon from its investment portfolio) to gross interest expense (including capitalised interests) remaining lower than 2x on a sustained basis (end-March 2013: 2.4x and end-September 2013: 2.2x).
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Nan Fung’s investment property division contributing a substantial portion to the company’s assets and EBITDA
- Maintaining a strong financial position such that its financial assets portfolio and cash levels are above total debt
- Nan Fung’s investment property EBITDA (rental and management fees) to gross interest expenses (including capitalised interests) exceeding 2x on a sustained basis (end-March 2013: 0.7x and end-September 2013: 0.7x)