Yesterday, Moody's changed the outlook to negative on the Baa3 issuer and senior unsecured ratings of Kazakhstan Temir Zholy (KTZ). The agency lowered the baseline credit assessments to ba3 from ba2 for KTZ and to b2 from b1 for Kaztemirtrans, a wholly owned operating subsidiary of KTZ.
The outlook change was driven by the agency's "concerns over covenant compliance, operating performance and liquidity in the next 18 months". The agency noted that KTZ may breach a financial covenant of debt/EBITDA at 4.5x on the loan from EBRD, but it also believes that the bank will likely to reset the covenant at a more comfortable level. The company's credit metrics were negatively affected by tenge devaluation, decrease in volumes of transportation (-15% YoY in 1H2015), lack of tariff indexation in 2015 and increase of operating expenses driven by cost inflation.
Operating performance of KTZ will be supported by 4-5% annual increase in regulated tariffs in 2016-2020, increase in the transit transportation volumes and a material reduction in the investment programme.
KTT will revert it business model to leasing company model and start to generate free cash flow from 2016 thanks to completion of the fleet modernization program.
We view the news as neutral to Eurobonds of KTZ, as deteriorating credit profile and rising macroeconomic risks are already priced in. KTZ'20 is trading at the same level as KMG'21, while ask YTM on KMG'43 is 50bp lower than on KTZ'42, which makes the latter one more attractive.