TEXT-Fitch affirms Kowloon-Canton railway at 'AA+'/stable

Fri Nov 16, 2012 2:18am EST

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(The following statement was released by the rating agency)

Nov 16 - Fitch Ratings has affirmed Hong Kong-based Kowloon-Canton Railway Corporation's (KCRC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AA+', respectively. The Outlook is Stable. The agency has also affirmed KCRC's Short-Term Foreign Currency IDR at 'F1+' and its foreign currency senior unsecured rating at 'AA+'.

KCRC's ratings are equalised with those of the Government of the Hong Kong Special Administrative Region (HKSAR, 'AA+'/Stable/'F1+') due to its strong strategic and operational ties with the government.

KCRC is a 100%-owned government-controlled entity, with concession payments from the 77% government-owned MTR Corporation (MTRC, 'AA+'/Stable/'F1+') as its primary source of cash inflows for debt servicing. KCRC is essentially a passive pass-through entity given that the company ceased rail operations in December 2007, when the issuer granted a service concession to MTRC to operate the KCRC network. KCRC's main task is to channel cash inflows from MTRC to service its existing debt obligations and to fund remaining capex for projects previously managed by KCRC. The highly predictable cash inflows (in the form of concession payments) from MTRC and the Hong Kong government's continuing priority in maintaining a financially robust MTRC underpin KCRC's credit profile.

The objective of its sole shareholder, the Government of the HKSAR, is to maintain a financially sound KCRC for the benefit of all its stakeholders. A managing board, comprising senior civil servants and government officials, closely monitors KCRC's financial performance. MTRC provides additional administrative support to KCRC's small management team under an outsourcing agreement.

The annual concession payment from MTRC includes a fixed component of HKD750m plus an additional variable component of MTRC's revenue generated from KCRC's railway assets. Fitch estimates the variable component to be over HKD800m per annum in the next three years. Given its limited capex needs, KCRC has adequate free cash flow to gradually amortise its debt. As at end-2011, KCRC's net debt amounted to HKD13.7bn, down from HKD14.4bn a year ago.

What Could Trigger A Rating Action?

Negative: Future developments that may individually or collectively lead to negative rating action include:

- Negative rating action on the Hong Kong sovereign

- Evidence of diminishing support from/or weakening ties to the HKSAR Government

Positive: Future developments that may individually or collectively lead to positive rating action include:

- Positive rating action on the Hong Kong sovereign

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