January 5, 2018 / 7:04 AM / a year ago

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

(The following statement was released by the rating agency) HONG KONG, January 05 (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 and significant ties with the Hong Kong Special Administrative Region (HKSAR) government (AA+/Stable) and MTRC's strategically important and monopoly role as Hong Kong's sole rail operator. 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 Midrange: The Hong Kong government is MTRC's largest and controlling shareholder, with a 75.3% stake as of 10 August 2017. The government will maintain majority ownership for 20 years from the date of the IPO, which is until 2020. The Mass Transit Railway Ordinance (MTR Ordinance) grants MTRC an exclusive franchise to operate the Mass Transit Railway and the Kowloon-Canton Railway as well as to construct and operate any extension to the Mass Transit Railway for 50 years, which is until 2057. Legally speaking, the MTR Ordinance states that MTRC can be in default. Strategic Importance 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 blueprint. It is the sole local expert for the HKSAR government to construct the express railway linking Hong Kong to mainland China. MTRC maintained a significant market share of Hong Kong's franchised public-transport market with its continually expanding network. Its network coverage ranges from the city's key commercial and metropolitan locations to rural areas. The extensive network is strategically important to the government's objective of providing a rail-based transit network as the backbone of the domestic transport system. Integration Stronger: Integration between the HKSAR government and MTRC is strong due to the public nature of MTRC's business. The HKSAR government has repeatedly demonstrated its ability and willingness to provide tangible support to maintain MTRC's financial robustness. The forms of support and collaboration include property development rights, fare setting rights - according to a fare-adjustment mechanism agreed with government - dividend waivers and capital grants. Chinese regional governments, such as the Shenzhen municipal government, have also offered annual subsidies for 10 years to aid the operation of the Shenzhen Metro Longhua Line. Control Stronger: The government appoints MTRC's chairman and directors due to its shareholding level. The overall management of MTRC's business is vested in the board. In addition to conventional appointment processes, which are based on the government's shareholding level, the MTR Ordinance empowers the government to appoint three additional directors to the board, which only the government can remove. Strong Standalone Profile: MTRC's stable core business plus resilient property business continue to maintain its strong financial profile. Almost 23% of the company's revenue came from its Hong Kong station commercial, property rental and management businesses as of end-2016. However, overall profit declined in 2016 due to lower activity in Hong Kong's property development sector. MTRC has satisfactory leverage, but faced high capex and debt-funded special dividends in 2016 and 2017, which totalled HKD25.9 billion in two equal tranches to fund the government's Express Rail Link construction. This increased MTRC's debt/Fitch-calculated EBITDA ratio to around 2.2x in 2016, from 1.1x in 2015. We expect ongoing capex plans and property market uncertainty to further test the company's financial profile in medium term. 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 Janet Liu Associate Director +852 2263 9983 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 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 Rating Criteria for Public Sector Revenue-Supported Debt (pub. 05 Jun 2017) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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