(The following statement was released by the rating agency) Fitch Ratings-Sydney-February 06: Fitch Ratings says the impact of the Wuhan coronavirus on our rated Australian issuers will largely stem from the expected reduction in Chinese tourist arrivals. This will dampen demand across a number of sectors, with the effect in our rated universe to be felt among retail-exposed REITs, Scentre Group Limited (A/Stable) and Mirvac Limited (A-/Stable), Australian airline Virgin Australia Holdings Limited (B+/Stable), casino operator Crown Resorts Limited (BBB/Stable) and Australian wine producer Amphora Finance Limited (Accolade, B/Stable). On the other hand, Fitch's rated Australian infrastructure issuers may be less affected by the outbreak.
If the impact from the virus is short-lived, we do not expect credit profiles to be materially affected. However, if the outbreak is not sufficiently contained by 1Q20, more corporate issuers can face rating pressures. We believe the strength of the financial profiles of the investment-grade Fitch-rated issuers will help them withstand the pressures they are likely to face over the coming months from any decline in demand. On the other hand, the sub-investment grade Fitch-rated issuers may see a slowing of the expected deleveraging we have incorporated into our forecasts. Since the outbreak of the coronavirus, the Chinese government has implemented a number of measures to minimise the spread of the disease, including the recent ban on tour groups leaving China and the grounding of flights from affected areas. Governments worldwide, including in Australia, have implemented restrictions on travellers entering the country from mainland China, among other measures. Furthermore, we believe that individuals will likely avoid travel to and from China - including Hong Kong and Macau - as they take precautions against this disease. The Australian tourism industry is likely to be most affected by these measures with Chinese tourists making up the largest proportion of inbound tourist numbers into the country, with around a quarter arriving as part of a tour group. Chinese arrivals reached 1.44 million for the 12 months to March 2019 - doubling in the past five years - and they spent around AUD12 billion in 2018, according to Tourism Australia. This, combined with the impact of the recent bushfires, will also likely lead to subdued domestic consumer confidence in Australia. In addition, demand for Australian exports of consumer goods may fall as people in the country avoid large social gatherings for fear of contracting the illness. We believe that Scentre and Mirvac will be able to withstand the effects of any slowdown in Chinese tourist visits and domestic consumer confidence. Both REITs' portfolios are more targeted towards the domestic market, with over 65% of the Australian population living within 30 minutes of one of Scentre's Westfield malls, while Mirvac's retail portfolio is mainly located in Australian east coast city suburbs with good demographics. To date, Australian consumers continue to go about their daily lives and are not avoiding public places, unlike other regions. In addition, REIT portfolios typically provide both lifestyle options and staple products, such as supermarkets, which we believe will support ongoing stable footfall despite any subdued domestic consumer sentiment. Scentre's mall in Sydney's central business district, Westfield Sydney, does have a significant number of luxury retailers that attract overseas visitors, with many from China, but around 80% of their sales remain domestically sourced. As such, we expect any slowdown in Chinese tourism to have a minimal impact on Scentre's overall results. Fitch expects Crown to also be able to withstand the likely slowdown in Chinese tourist numbers, with VIP revenues most likely to be affected. The impact is likely to be limited as Crown's exposure to these revenues has declined since the financial year ended June 2016 (FY16), following the arrests of Crown employees in China in October 2016. VIP revenues contributed only 16% of total revenues in FY19, down from 25% in FY16; however, both the cash flow and EBITDA contribution are lower than this. We expect to see some decline in mass-market revenues, with lower tourist arrivals and subdued domestic confidence likely reducing discretionary spending, but operators are managing the decline somewhat due to their high variable-cost base. However, Crown's forecast deleveraging following the completion of construction of its Crown Sydney development - which is targeted at VIPs under its licence conditions - could be slowed if the effects of the coronavirus continue to be felt in 2021 when the venue is due to open, despite our expectation that the majority of the deleveraging will come from forecast apartment sales of AUD800 million, of which AUD450 million has already been achieved. Furthermore, Crown reported a net cash position in FY19 and Fitch expects its leverage, measured as adjusted net debt (excluding working capital cash)/EBITDAR, to peak at 0.8x in FY21, which is well within its rating sensitivities. This, combined with Crown's limited exposure to VIP revenues in its current business, supports Fitch's view that Crown's strong financial profile will help it withstand the potential impact of the coronavirus on its business. The closest example available to understand the potential impact for airlines is the SARS virus outbreak, which lasted from February to July in 2003 globally, and coincided with the start of the war in Iraq. According to IATA, international revenue passenger kilometres (RPKs) declined by around 4% during this time and mainly affected Asian carriers, while data from the Australian Department of Infrastructure, Transport, Cities and Regional Development showed domestic RPKs and load factors remained relatively stable on a rolling 12-month basis. However, total inbound and outbound international passengers in 2003 fell by just under 2%, despite an increase in flights to and from Australia by around 5% from a year earlier. Qantas said in its FY03 results that inbound visitors to Australia fell by more than 20% in some months and by up to 45% on some of its Asian routes. As a result, it reduced its international capacity by around 20% from April 2003, among other measures, and yields fell after fears began to recede as pricing was used to encourage people to resume travelling. The comparison with this event is useful to provide some context to potential outcomes of the coronavirus, but we still do not know the extent or duration of the current event and therefore cannot conclude that this will be more or less pervasive for airlines. Fitch expects Virgin Australia to be the most-affected issuer in our Australian-rated universe. Virgin Australia's international business is likely to experience the most pressure, particularly its Hong Kong routes, and the airline has stated that group bookings have fallen since the ban on tour groups was put into effect. However, to date, it has not seen an increase in individuals wishing to cancel or change their itineraries, although we expect demand for this route to become more subdued while the travel advisories remain in place. Virgin Australia had already announced prior to the outbreak of the disease that it would reduce the number of flights to Hong Kong, which now stands at one service daily and will cease completely from 2 March, and replace these flights with new routes to Japan and other destinations, which will help the airline minimise any losses from the outbreak. Nevertheless, it will likely slow the ongoing turnaround in the business. We also expect some decline in domestic revenues for Virgin Australia due to its role as a feeder network for its and its partners' international networks. However, this is likely to be limited as the domestic business generates the majority of its revenue and EBITDA and we expect demand to be supported by the strengths inherent in the Australian aviation market, particularly from the size of the country where flying remains the only viable option for travel between cities and the incumbent airlines' access to slots at Australia's major airports. In addition, should demand for aviation in Asia fall, this could lead to a decline in jet fuel prices and further mitigate any negative impact on the airlines' profitability, while domestic travel in Australia could be boosted if the outbreak is long-lasting. Nevertheless, these challenges may slow Virgin Australia's ability to deleverage to within our rating guideline, which we currently expect by FY21. We expect Accolade's Chinese growth plans to be hurt should the precautions being taken in China, including avoiding social gatherings, which will decrease the demand for wine, be long-lasting. Currently, Accolade generates the majority of its revenues in Australia and the UK, which provides some shield against a decline in demand for Australian wine in China, and it has a small market share in China, which still provides a base for growth. Nevertheless, we have included some benefits of the company's expansion into China into our rating case and its expected deleveraging, and the company has already taken steps to restructure its business to implement this new strategy. Therefore, ongoing subdued demand in China could slow its ability to reduce leverage to within our guidelines. Fitch expects any impact of the coronavirus on our rated Australian infrastructure issuers to be relatively minor due to their lack of reliance on tourism or international travel. However, it could affect the revenues of some issuers or their customers if the outbreak substantially increases to the point where it materially influences economic growth or international trade. There is likely to be a near-term impact on shipping volumes due to the extension of the Lunar New Year shutdown in China and the imposition of quarantine rules on vessels that have transited from China in the past 14 days. Some of the coal from Fitch's three rated coal-export terminals - DBCT Finance Pty Limited (BBB-/Stable) and Adani Abbot Point Terminal Pty Ltd (BBB-/Stable) in Queensland, and Newcastle Coal Infrastructure Group Pty Ltd (BBB-/Stable) in New South Wales - is shipped to China. A prolonged slowdown in industrial activity in the country - particularly in steelmaking, which uses metallurgical coal - could result in a reduction in volumes shipped. However, the revenues of the export terminals are largely independent of throughput due to the use-or-pay nature of their contracts with the coal mines.
The financing arm of the Port of Melbourne (Lonsdale Finance Pty Ltd; BBB/Stable), a large diversified shipping port, is highly dependent on international trade, including a substantial amount with China. However, its risk is mitigated in part by the diversity of its throughput, which includes both container and bulk volumes across numerous industries. It also benefits from long-term lease agreements with some users, making one-third of its revenue independent of shipping volumes. The assets of toll-road operator Transurban Finance Company Pty Limited (A-/Stable), which also has partial ownership of two individual roads - AMT Management Limited (A-/Stable) and WSO Finance Pty Limited (A-/Stable) - are metropolitan-area spur and orbital roads that should have little impact from a tourism downturn. However, their traffic increases are generally correlated with economic growth, and could be hurt in the event the coronavirus outbreak increases in severity such that it negatively affects the Australian economy. For more information in relation to Fitch's broader APAC portfolio, see Fitch Ratings: Coronavirus May Add to Liquidity Strain for Some APAC Corporates /a , published today. Contact: Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 David Cook Director +61 2 8256 0363 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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