Mr. Richard Allen - March 20, 1992 - page 2
JPMorgan
Creditworthiness
We believe that the Financial Plan as proposed should present to bankers a viable commercial entity in the form of Hong Kong's new airport management company. We feel that bankers will perceive that. as a monopoly provider of a critical service and inheritor of the successful Kai Tak "franchise", the Authority should be assured of sufficient traffic to provide a relatively predictable revenue stream, and that Management will have enough control over revenue and cost to assure that cash flow is adequate to cover the Authority's cash needs including projected debt service. We believe that bankers will see that they will be insulated from risks they do not finance, such as project completion risk, and that they will find acceptable the commercial risk of the airport once it is complete. As to lender concerns about 1997, we believe that bankers will be comfortable with the type of confirmation from China which we are advised could be available. Therefore, subject to successfully converting the Outline into a more detailed and legally binding Shareholders Agreement, and under the Financial Plan as currently conceived, we find the Authority "bankable" from a credit risk point of view.
Market Capacity for the Authority's Debt
We agree with the assumption that the commercial banking market will account for most of the debt financing required by the Authority and by most other Hong Kong borrowers of long-term debt over the next five years. Bearing this in mind, we believe that the unprecedented size of the Authority's debt requirements (potentially HK$37 billion), taken together with the long-term funding needs of other public and private sector borrowers, will tax the banking community's capacity for Hong Kong and China risk on a global scale. We are also concerned that lenders are likely to perceive that the Authority will be less creditworthy than other Hong Kong borrowers, notably MTRC, China Light, and HKG, itself, either directly or as guarantor of the Lantau Fixed Crossing. Finally, we are also concerned about timing, since these same borrowers are likely to go to market before the Authority is able to do so with the potential for market capacity to be materially consumed.
Taking these factors into account under present market conditions, which are admittedly depressed for large-scale project financings, we conclude that there is a possibility that the Authority will fall short of its funding objectives with the result that the Authority could require additional equity from HKG outside the framework of the Financial Plan. (This possibility increases if the only available financing tactic is to place 100% of the Authority's debt with banks in a single project financing).
Given that our concem in this respect relates strongly to general market conditions and the financing demands of competing borrowers, it follows that the evolution of these matters, which are largely outside the Authority's control, will affect our confidence that the Authority will meet its full funding objectives.