[ET Net News Agency, 23 July 2019] S&P Global Ratings said today that MTR Corp. Ltd.
(MTRC)(00066) has sufficient financial buffers to absorb a loss provision that ultimately
relates to the MTRC's insufficient oversight in the construction of the Shatin to Central
Link (SCL).
This provision and other potential liabilities weaken the company's credit metrics in
the near term and diminishes the buffer at the current rating (AA+/Stable/A-1+).
MTRC proposed to temporarily set aside a provision of HK$2 billion (US$260 million) in
order to move forward with the phased opening of SCL's Tuen Ma Line in the first quarter
of 2020. The phased opening allows more transit options for the general public and helps
divert some of the passenger traffic in eastern Kowloon area. Construction of the Tuen Ma
Line is currently 98% complete, with the New Hung Hom Station being a key bottleneck.
The credit rating agency believes the provision covers the potential costs associated
with the workmanship and insufficient record related to the new Hung Hom Station and
alteration of signaling systems to allow the phased opening of Tuen Ma Line. The company
provided no official split of the liability, however.
The provision, announced on 18 July 2019, is for the first-half 2019 financial period.
It accounts for 14%-16% of S&P's forecasted 2019 EBITDA for MTRC, and 15%-17% of its funds
from operations. While this is credit negative in the near term, it does not significantly
impact MTRC's leverage profile.
In addition, once an independent inquiry into the SCL missteps is complete and the
subsequent financial settlement is completed, the company may be able to recover part of
the loss from its contractors or the Hong Kong government.
That said, S&P believes MTRC still faces financial downside related to the investigation
and potential settlement. If the company is found to have breached its warranty under the
entrustment agreement for the construction and commissioning of the SCL, the Hong Kong
government can claw back up to HK$7.9 billion of management fees from MTRC. (KL)