Fitch Ratings has affirmed Kowloon Canton Railway Corporation's long term foreign and local currency issuer default ratings and foreign currency senior unsecured rating at AA+. The outlook is stable. The agency has also affirmed KCRC's short term foreign currency IDR at F1+.

KCRC's ratings are equalized with those of the government of the Hong Kong Special Administrative Region due to its strong strategic and operational ties with the government. As such, future rating actions on Hong Kong's sovereign ratings would have a direct impact on KCRC's ratings. In addition, any deterioration in the relationship and rating linkages with the government could also negatively affect KCRC's ratings.

KCRC continues to be a 100% owned government controlled entity, with concession payments from MTRC (which is 77% owned by the government, rated 'AA+'/Stable/'F1+') as its primary source of cash inflows for debt servicing. KCRC is essentially a passive pass through entity given the company no longer operates any rail network or any rail-related operations after its operational merger with MTRC in December 2007.

KCRC's main task is to channel cash inflows from MTRC to service its existing debt obligations and to fund remaining CAPEX for projects previously managed by KCRC. The highly predictable cash inflows (in the form of concession payments) from MTRC and the Hong Kong government's continuing priority in maintaining a financially robust MTRC underscores KCRC's credit profile.

The objective of its sole shareholder, the Government of the HKSAR, is to maintain a financially sound KCRC for the benefit of all its stakeholders. A managing board, which is composed of senior civil servants or government officials, closely monitors KCRC's financial performance. Following the operational merger, MTRC provides additional administrative support to KCRC's small management team under an outsourcing agreement.

The annual concession payment from MTRC includes a fixed component of HKD 750 million plus an additional variable component of MTRC's revenue generated from KCRC's railway assets. Fitch estimates the variable component to be in the range of HKD 550 million to HKD 650 million in the next three years. Given that outstanding CAPEX is expected to be fairly small, KCRC has adequate free cash flow to gradually amortize its debt. As at end 2010, KCRC's total debt amounted to HKD 15.1 billion.