S&P Downgrades Hit Hong Kong Property Sector

by Mary Swire, Tax-News.com, Hong Kong

22 May 2002

Ratings agency Standard & Poor's yesterday cut ratings on Hongkong Land, Swire Pacific and Hysan Development and downgraded the outlook for Sun Hung Kai Properties (SHKP), Wharf (Holdings) and Kerry Properties from 'stable' to 'negative'. Share prices in the property sector fell in reaction to the news.

The agency was responding to over-supply in Hong Kong's property market, alongside continued deflation and fiscal weakness, but local analysts said that negative factors in the market had been known about for a long time, and there was no new deterioration to justify a sudden downgrading of most of the companies concerned. In fact, there have been some signs of renewed strength lately, at least in the residential market.

Several of the companies reacted negatively to the news. Cheung Kong (Holdings) said it was in a very strong financial position with interest cover at 7.3 times and extremely low net debt of 9.6% of shareholders' funds, while a spokeswoman for Swire Pacific said S&P appeared to have taken a very cautious view of the short-term outlook for the property market.

Jason Carley, manager of credit research at Merrill Lynch, told the South China Morning Post that the bond yields of the named companies moved from 5 to 12 basis points higher than benchmark United States Treasuries after the downgrades, reflecting a higher risk premium. Hutchison Whampoa's 10-year bonds moved from 148 basis points over US Treasuries to 160 points.

"It didn't come as a huge surprise but the timing surprised a little. Most of the issues have been pretty well known for the last 12 months," Mr Carley said.

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