January 6, 2017 / 10:06 AM / 3 years ago

Fitch Affirms Hong Kong's MTR at 'AA+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, January 06 (Fitch) Fitch Ratings has affirmed Hong Kong-based rail transit network operator MTR Corporation Ltd's (MTRC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AA+'. The Outlook is Stable. The agency has also affirmed MTRC's Short-Term Foreign-Currency IDR at 'F1+' and senior unsecured rating at 'AA+'. MTRC's ratings and the Stable Outlook reflect the company's strong ties with the Hong Kong Special Administrative Region government (AA+/Stable) and MTRC's strategic role as Hong Kong's sole rail operator. Fitch has switched to rating MTRC as a public-sector entity due to its strategic role, from rating it as a corporate entity. However, the change in criteria has not resulted in any change in the rating. KEY RATING DRIVERS Ratings Equalised with Government: MTRC's ratings are equalised with the Hong Kong government due to its strong linkage and high strategic importance. There is an extremely high likelihood MTRC would receive extraordinary government support, if needed. Legal Status Attribute Midrange: The Hong Kong government is MTRC's largest and controlling shareholder, with a 75.4% stake as at end-June 2016. The government has pledged to continue to hold at least 50% shareholding in company for at least 20 years from the date of the IPO (up to 2020). The Mass Transit Railway Ordinance (MTR Ordinance) grants MTRC an exclusive franchise to operate the Mass Transit Railway, the Kowloon-Canton Railway and to construct and operate any extension to the Mass Transit Railway for 50 years until 2057. Legally speaking, the MTR Ordinance states that MTRC can be in default. Strategic Importance Attribute Stronger: MTRC is Hong Kong's sole government-owned railway operator, bearing a highly strategically important role to improve Hong Kong's public transport and implement the government's transportation policy. MTRC maintained a dominant market share of Hong Kong's franchised public transport market, as its network covers Hong Kong's key commercial and residential locations. MTRC's extensive network coverage also marks its importance to the government's stated objective of providing a rail-based transit network as the backbone of the domestic transport system. Integration Attribute Stronger: Due to the public nature of the business, the policy and financial ties between HKSAR government and MTRC are strong. Despite there being no direct guarantee or operational subsidies provided by government, to maintain MTRC's financial robustness, the HKSAR government has repeatedly demonstrated its ability and willingness to provide tangible financial support to the company. Such support could be in the form of property development rights, dividend waiver or capital grants. Control Attribute Stronger: The government is the majority and controlling shareholder and appoints MTRC's chairman due to its level of shareholding. The oversight of the company's business is vested in the board, and day-to-day management of business is delegated to professional managers. The MTR Ordinance also empowers the government to appoint three additional directors that only the government can remove from the board. Strong Standalone Financials: MTRC maintains a strong financial profile and we expect the company to continue generating stable recurring cash flow (around 40% EBITDA margin), supported by its stable core business and resilient property rental and management business. MTRC is financially sound with a low leverage ratio, but its credit profile is distorted by high capex and a debt-funded special dividend of HKD25.9bn paid in two equal tranches in 2016 and 2017 to fund the government's construction of the Express Rail Link. The first tranche was paid on 13 July 2016 and the second tranche will be paid in 2H17. Fitch expects MTRC's debt/Fitch-calculated EBITDA to increase to around 2.5x in 2017, from 1.3x at end-2015. and for debt/capital to be 27% in 2017, compared with 11.7% in 2015. RATING SENSITIVITIES Positive rating action on the Hong Kong sovereign, in conjunction with continued strong government support, would result in a similar change in MTRC's ratings. A downgrade of the sovereign's rating, significant changes leading to a dilution in government ownership and control or weakening links with the government - including the strategic importance of MTRC to Hong Kong and government policy support - could trigger a rating downgrade. Any rating action on MTRC's IDR would result in similar rating action on its senior unsecured rating. Contact: Primary Analyst Lin Pei Associate Director +852 2263 9912 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Terry Gao Director +852 2263 9972 Tertiary Analyst Cecilia Chan Associate Director +852 2263 9905 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities - Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017265 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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