Standard & Poor's has warned that its credit ratings for MTR Corp (MTRC) and Kowloon-Canton Railway Corp (KCRC) could come under pressure as the government discusses the merger of the two railway companies. It said they are vulnerable to a number of factors, specifically to changes in the regulatory environment and to a decline in government support. Weaker ratings would mean the two, Hong Kong's largest corporate borrowers with combined debts of about HK$50 billion in 2001, would face higher funding charges. Standard & Poor's director John Bailey said the agency saw no immediate changes in the corporations' credit ratings, but it was closely monitoring the situation. Both enjoy a AA-minus credit rating because the government controls about 77 per cent of MTRC and 100 per cent of KCRC. 'It's important that the government's support in property subsidies or equity infusions, is always integral to these companies,' Mr Bailey said. The international credit rating agency said yesterday the government was likely to integrate the corporations into a rail giant to ease its swelling deficit and facilitate the sale of its second tranche of MTRC shares. 'When you look at the financial profile on a stand-alone basis that is somewhat lacklustre, they are much lower as a rating,' Mr Bailey said. MTRC and KCRC face an imminent challenge as the government gets set to introduce a mechanism for determining public transport fares. Mr Bailey warned that any fare cuts would cause significant adverse impact on the rail operators' financial profile and could make it more difficult for the government to sell the merged entity. Last year, Standard & Poor's threatened to downgrade the SAR's sovereign rating unless the administration cut its deficit. Although the agency believed the merger would help stem the government deficit, how much it could raise from the sale of the merged entity was another question given KCRC's huge capital expenditure on future rail projects. Analysts estimated KCRC would need to raise about HK$47 billion to fund an investment of about HK$65 billion in future projects. The government said yesterday it would finish the merger study as soon as possible, but it had not yet appointed any financial advisers.