S&P continues to downgrade ratings of quasi-sovereign issuers

Sabina AmangeldiFebruary 20, 2015

Yesterday, S&P lowered long-term corporate credit ratings of KazTransOil (KTO) and KazTransGas (KTG) to BB+ from BBB-, the outlook is negative. At the same time, the agency cut Samruk-Energy (SE) to BB from BB+, with a stable outlook. The rating actions follow the sovereign rating downgrade. 

The credit rating of KTO is capped at the level of its parent company, NC KMG, at BB+. The standalone credit profile (SACP) of KTO is assessed at bb+ based on 'fair' business risk profile and 'modest' financial risk profile. The agency notes that KTO has good financial flexibility which is reflected in adequate  cash position and available borrowing capacity. In base scenario, S&P assumes KTO to report about 6% revenue growth in 2014-2015 and flat EBITDA margins at about 53-55%. Capital expenditures are expected to be at T30-70bn per year and dividends at T35-45bn in 2014-2016. This all will result in a positive free operating cash flow of about T20-60bn in 2014-2016, and debt to EBITDA ratio of less than 1x.

The SACP of Samruk-Energy is assessed at b+, which incorporates the agency's assessment of 'weak' business profile and 'aggressive' financial risk profile. The company has an ambitious investment program and fairly high debt to EBITDA ratio, according to the agency. However, the agency believes that these risks are partially mitigated by its view of the high likelihood of timely and sufficient extraordinary support from the government if needed. S&P notes SE's average profitability, which is higher than peers in the CIS countries.

S&P assesses the SACP of KTG at bb, based on its 'fair' business risk profile, 'intermediate' financial risk profile, and 'negative' financial policy. The company has moderate debt levels, and the agency expects debt to EBITDA ratio to be not higher than 3x during 2014-2015. S&P expects KTG to generate negative free operating cash flow in 2014-2015 due to continued planned investments. KTG is exposed to foreign currency risk, as more than 95% debt is denominated in USD. This risk is partially offset by the fact that its 57% of revenue is denominated in USD.  S&P expects a revenue growth of 15% in 2014 and 3% in 2015, and EBITDA margins to be at 22-25%. Capital expenditures are forecasted at about T55-70bn per year, and dividends of about T12bn.

The news is negative to credit profile of the companies, but is already priced in the current yields of outstanding public debt. Yields on Eurobonds of Samruk-Energy rose by 200bp to 5.1-5.6% since November 2014 on account of rising macroeconomic risks. We have Samruk -Energy under credit coverage with a Stable outlook and Hold recommendation.