SMRT to pay off part of debt from asset sale cash
Singapore
SMRT Corp does not intend to use the estimated S$991 million from the asset sale to the government to pay any special dividend to shareholders but will instead pay off part of its debt.
In a statement on the transition to the New Rail Financing Framework (NRFF), the rail operator said the group's total debt level is expected to be at S$762 million on Sept 30 this year. The NRFF licence starts from Oct 1. It said: "To be prudent, the company intends to use part of the net proceeds from the Proposed Sale to retire some of its existing debt."
A portion of this debt was used to fund investments in its rail operating assets. SMRT also said it will pay IRAS approximately S$159 million as a tax payable on the difference between the sale proceeds and the residual capital allowances relating to the operating assets. "In addition, the company will invest in the strengthening and further development of its rail engineering competencies for service reliability."
According to SMRT, the NRFF is not expected to affect its other existing non-rail business areas.
In its SGX announcement, SMRT warned shareholders there is no certainty it will earn an EBIT margin of about 5 per cent under the NRFF licence.
"The licence charge structure provides a revenue shortfall sharing, and a profit-sharing mechanism based on a tiered EBIT cap starting at 5 per cent and an EBIT collar at 5 per cent. Any EBIT deviations beyond the cap and collar would be shared with LTA, with LTA's sharing of downside risks limited to the licence charge payable for the financial year."
It added: "If SMRT Trains is able to generate profits above a certain threshold (EBIT margin in excess of 5 per cent), LTA will share the upside via a tiered sharing arrangement (cap) incorporated in the licence charge, with a prescribed percentage of up to a maximum of 95 per cent of the incremental EBIT margin exceeding 5 per cent. Conversely, the risk-sharing features of the cap and collar also calibrate the licence charge payable to LTA (collar). When the overall EBIT margin falls below 3.5 per cent, 50 per cent of the shortfall will be borne by LTA."
At a briefing, SMRT president and group CEO Desmond Kuek called the new framework a better model than the current one for its ability to share risk. "But it is not as sustainable as we would like it to be."
This is due to the "significant risk" as SMRT is still not in control of fares and has no visibility on ridership.
Under the NRFF, however, SMRT Trains may request a review of the licence charge if it believes there are good reasons to do so, such as when the EBIT margin has fallen below a certain threshold; there are exogenous cost increases to SMRT Trains which are beyond the control of SMRT Trains and LTA; or there is a lag in fares relative to the maximum fare derived under the fare adjustment formula affecting the sustainability of SMRT Trains.
Any review is at LTA's discretion.
READ MORE: Government to take over SMRT's rail assets
