RPT-Fitch affirms KCRC at 'AA+'; outlook stable

Tue Jan 14, 2014 3:25am EST

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Jan 14 (Reuters) - (The following statement was released by the rating agency)

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+'. The Outlook is Stable. The agency has also affirmed KCRC's Short-Term Foreign-Currency IDR at 'F1+' and senior unsecured rating at 'AA+'.

KEY RATING DRIVERS

Equalised with the HKSAR: KCRC's ratings are equalised with those of the Hong Kong Special Administrative Region (HKSAR; AA+/Stable/F1+), reflecting their strong strategic and operational ties. Fitch expects KCRC's linkages with the HKSAR government to be stable on a sustained basis, which underpins the Stable Outlook.

Passive Entity: KCRC is 100% owned and controlled by the HKSAR, and its primary source of cash inflows for its debt servicing is MTR Corporation (MTRC, 'AA+'/Stable/'F1+'), which is 77% owned by the HKSAR. KCRC is essentially a passive pass-through entity after the company ceased rail operations following the operational merger with MTRC in December 2007. KCRC granted a service concession to MTRC to operate the KCRC network in return for annual concession payments.

Cash Inflows Highly Predictable: KCRC's main task is to manage cash inflows from MTRC to service its existing debt obligations and to fund remaining capex for projects previously managed by KCRC. The determination of the annual concession payment is formula based and results in highly predictable cash inflows. The HKSAR government will continue to maintain a financially robust MTRC a priority, which underpins KCRC's credit profile.

Financial Robustness Government's Objective: The objective of KCRC's sole shareholder, 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, monitors KCRC's financial performance closely. KCRC maintains a very small management team and outsources its administrative functions to MTRC.

Annual Concession Payment: The annual concession payment from MTRC includes a fixed component of HKD750m plus a variable component based on MTRC's revenue generated from KCRC's railway assets. Fitch expects the variable component to be around HKD900m per annum in the next three years. With a total cash inflow of over HKD1.6bn and a very limited capex requirement, KCRC has sufficient free cash flow (FCF) to amortise its debt gradually. KCRC's net debt has improved to HKD8.2bn at end-2012 from HKD13.7bn a year earlier, and this is expected to reduce further.

RATING SENSITIVITIES

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

- Negative rating action on the HKSAR

- 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 HKSAR provided the linkage remains intact

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