OREANDA-NEWS. S&P Global Ratings said today that it had revised its rating outlook on Singapore-based transport operator SMRT Corp. Ltd. (SMRT) to stable from negative. We also affirmed our 'AAA' long-term corporate credit rating and 'axAAA' long-term ASEAN regional scale rating on SMRT. At the same time, we affirmed our 'AAA' and 'axAAA' long-term issue rating on SMRT Capital Pte. Ltd.'s senior unsecured notes. SMRT fully guarantees the notes.

"We affirmed the rating and revised the outlook to stable because we believe that SMRT's capital structure will benefit from the implementation of a new regulatory framework ("New Rail Financing Framework") for its trains business," said S&P Global Ratings credit analyst Wei Kiat Ng. "We estimate that the company's ratio of funds from operations (FFO) to debt to be above 35%. We expect the ties between the company and the government to remain close in the new framework."

On July 15, 2016, the Land Transport Authority of Singapore (LTA) announced the conclusion of its discussions with SMRT on the transition of the company's operated lines to the New Rail Financing Framework (NRFF), which the government had announced in 2008. The NRFF will start from Oct. 1, 2016, subject to shareholders approval at the Extraordinary General Meeting. The license for SMRT will allow it to operate the lines until Sept. 30, 2031, with an option to extend by five years thereafter. As part of the transition to the NRFF, LTA will purchase part of SMRT's operating assets for Singapore dollar (S$) 991 million, of which the company will receive S$797 million (S$638 million net of tax) immediately and the balance over the next three anniversaries of the completion date.

We understand that SMRT will largely earmark the proceeds to repay debt, including S$550 million in bonds due in October 2017. In addition, the company's annual capital outlay will more than halve under the new framework, and amount to well below S$200 million per year. Lower debt and capital intensity mean the company's leverage will decisively and sustainably reduce.

Under the NRFF, SMRT's profitability in its core rail operations will be determined by a risk sharing mechanism with LTA. This means the EBIT margin is unlikely to fall below 3.5% or rise above the target margin of 5.0%. This band will translate into better earnings predictability for the company, in our view.

The NRFF does not alter our view of an extremely high likelihood of extraordinary government support for the company. A very strong link exists between the company and its majority owner, the government of Singapore, through Temasek Holdings (Private) Limited, which we believe will not dilute its 54.3% stake in SMRT in the foreseeable future. In addition, a shorter license and the transition to an asset light model will not undermine the critical role of SMRT as a key provider of essential public transport services in Singapore, in our view.

"The stable outlook on SMRT reflects our expectation that LTA will implement the NRFF from Oct. 1, 2016, which will support the company's capital structure," said Mr. Ng.

The outlook also incorporates our expectation of: (1) unchanged likelihood of support from the Singapore government; (2) marked debt reduction by SMRT through asset disposals; and (3) lower future capital expenditure for the company.

We could downgrade SMRT if: (1) we lower the sovereign credit rating on Singapore; (2) the likelihood of extraordinary government support to the company reduces, which could happen if SMRT embarks on significant offshore investments or if market-based competition increases, weakening SMRT's role; or (3) SMRT's 'aa-' stand-alone credit profile (SACP) weakens.

We could lower our assessment of SMRT's SACP if: (1) the contribution of domestic, regulated activities to the company's revenues declines significantly; (2) SMRT's profitability is more volatile under the NRFF than we expect, such that we revise its earning profile; or (3) the company's cash flow adequacy deteriorates, with the ratio of FFO to debt falling permanently below 35%.

The rating has no upside potential because it is at the top of S&P Global Ratings' ratings scale. We see limited upside potential for the SACP, given the contribution of unregulated activities to the company's earnings.