On November 7, Fitch downgraded Samruk-Energy's long-term foreign currency issuer default rating (IDR) and foreign currency senior unsecured rating to BBB- and BB+, respectively, with a stable outlook on both.
The rating downgrade was driven by 'weakened legal ties' between Samruk-Energy and the government as the share of state-guaranteed debt declined from 19% in 1H2012 to 9% of gross debt as of October 2014. The agency applies a one-notch difference between IDR and debt ratings 'due to the lack of clarity and consistency in its financial policy and group debt management... as well as expected changes in the group structure as a result of planned assets disposals and the company's acquisitive strategy'.
According to the agency, T236bn of loan received from the shareholder to buy EGRES-1 will be refinanced by an equity contribution of T121bn and issue of subordinated bonds of T100bn by the end of 2014 - early 2015 to be purchased by Samruk-Kazyna. A significant contribution of EGRES-1 to the group's 2014 EBITDA and the conversion of about half of the loan used to finance EGRES-1 acquisition into equity will have a largely neutral effect on SE's credit metrics, according to Fitch.
Fitch notes that SE will likely breach a leverage covenant of debt/EBITDA below 4.5x in the loan agreement with EBRD after 2015, if the covenant level is not reset or if the company does not receive additional financial support from the state. At the same time, the agency highlights strong operational and strategic links between SE and the state, which historically provided sizeable tangible financial support. According to Fitch, the company expects to receive about T82bn equity injections during 2015-2018 for the modernization of the Almaty and Balkhash power stations.
Our view. We view the news as negative for Eurobonds of Samruk-Energy as its rating is now below the lowest investment grade category. This is unacceptable level for some asset managers in the local market and might result in a sell-off. However, we also acknowledge that a potential rating downgrade by S&P and Fitch, which both had a negative outlook on Samruk-Energy, apparently, have already been priced in with SE’17 and Intergas’17 (BB+) trading at almost similar levels. We have Samruk-Energy under credit coverage with a stable outlook and a Hold recommendation.