OREANDA-NEWS. The ratings on Hong-Kong's MTR Corporation Ltd (MTRC, AA+/Stable) will not be affected by the expected distribution of special dividends in 2016-2017, Fitch Ratings says.

MTRC's Issuer Default Rating is credit-linked to its parent, the government of Hong Kong (AA+/Stable), in line with Fitch's parent-subsidiary linkage methodology. MTRC's standalone rating of 'A+' will also not be immediately affected as it has already factored in the distribution of the dividends, which is offset by the company's strong cash generation from its rail operations and stable property operations in Hong Kong.

MTRC has received the necessary approvals for the distribution of HKD25.76bn in special dividends, which will be paid in cash in two tranches in 2H16 and 2H17. The company received the approval for the dividend from its independent shareholders on 1 February 2016. On 11 March 2016, the Legislative Council approved MTRC's funding request for the Guangzhou-Shenzhen-Hong Kong Express Rail Link Project (XRL Project), which is a pre-requisite for the dividend payment. The Hong Kong government will receive HKD19.51bn in dividends, which will be used to cover the cost overruns for the XRL Project.

The XRL Project will be positive for MTRC's longer-term business profile. In 2015, patronage on cross-boundary services between Mainland China and Hong Kong reached over 114 million journeys, which accounted for 18.8% of MTRC's transport operation revenue in Hong Kong. The completion of the XRL Project will be important to MTRC's future growth; commercial and tourist activities between Mainland China and Hong Kong are likely to continue to increase.

MTRC expects to have additional, though limited, financial responsibility from the amended XRL Project agreement. MTRC's major additional liability is to be responsible for any additional overruns above the latest project cost estimate of HKD84.42bn. The management does not expect material overruns with 98% of the excavation and 70% of the concrete structure completed for the West Kowloon Terminus.

We expect MTRC's credit profile to remain strong, although weakened by the HKD25.76bn special dividend. Fitch expects MTRC's financial leverage, as measured by FFO-adjusted net leverage, to remain at around 3x (2014: 0.7x) and its FFO fixed-charge coverage to weaken to 5x (2014: 8.0x). The credit profile is supported by MTRC's stable cash flow generation, despite a large capex programme during the next couple of years.

MTRC's EBITDA reached HKD16.1bn in 2015, up from HKD15.4bn in 2014. The underlying growth is supported from its Hong Kong transport operations, which reported 3.2% rise in EBITDA to HKD7.2bn in 2015. Domestic patronage in 2015 reached 1,578 million journeys, which was a 1.9% rise from that in 2014, which had the benefit of increased patronage during widespread protests in the city. The increased patronage also supports MTRC's station commercial segment, which leases properties in its stations and serves mainly mass-market domestic consumers.

MTRC plans capex of HKD40bn from 2016 to 2018, with HKD20bn to be spent in 2016. Capex is likely to remain high in the long term, with the Hong Kong government planning to add 34.8km of new railway routes within the next 10-15 years.