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AKIPRESS.COM - Standard & Poor's Ratings Services said July 10 it affirmed its long- and short-term local and foreign currency issuer credit ratings on Kazakh government-related entity (GRE) Samruk-Kazyna (SK) at 'BBB+/A-2'. The outlook is negative.
The ratings on SK reflect S&P's classification of the fund as a GRE and the assessment that there is an "almost certain" likelihood that the government of Kazakhstan would provide timely and extraordinary support to SK if it ran into financial difficulties.
SK's "integral" link with the government, which fully owns the fund and offers strong direct and implicit support, including regular capital injections. Despite several changes at the shareholder level, the government is closely involved in determining SK's strategy, which is set out in several key strategic documents; and SK's "critical" role as the government's main vehicle for implementing
its agenda for strategic industrialization and long-term economic sustainability and diversification. SK controls essentially all strategic assets in Kazakhstan.
SK has been implementing key national policies since it was established by a presidential decree in 2008. It consolidates almost all of Kazakhstan's state-owned assets and manages them on behalf of the government, playing a central role in meeting the government's key economic, political, and social objectives.
SK is highly integrated with the government, and the government plays a decisive role in its operations. By law, all board members are heads of central executive bodies and the prime minister of Kazakhstan is the chairman. Although the government plans to sell minority stakes in several
subsidiaries of SK through the "People's IPO" program, launched in 2012, and through a recently initiated privatization program, we understand that SK will retain control over these assets. There are no plans to privatize SK to any extent.
S&P assesses SK's stand-alone credit profile (SACP) at 'b+', based on assessment of its business risk profile as "fair" and its financial risk profile as "highly leveraged." The rating assesses SK on a consolidated basis because it as a long-term strategic investor in national companies.
S&P assessment of SK's business risk profile reflects S&P's view of the only fair quality of the group's key assets in the oil and gas sector and transportation sector, which together are responsible for over 80% of the group's profits. S&P views the fund's ongoing divestment of weak financial sector assets as slightly positive for its stand-alone creditworthiness, as these assets have been loss-making, with substantial debt, and have required considerable financial support. However, the group remains exposed to the weak local financial system, where it holds its sizable cash balances.
S&P's assessment of the group's financial risk profile as "highly leveraged" reflects our expectation of significantly negative free operating cash flow, as S&P anticipates that the group's heavy investments and potential acquisitions are likely to increase already relatively high consolidated debt. S&P expects the ratio of debt to EBITDA to increase to about 4x in 2014 from 3x at the end of 2013, and the ratio of funds from operations to debt to decline to about 15%-20% in the next two-to-three years from 24% in 2013. With consolidated adjusted debt of Kazakhstani tenge (KZT) 4,847.3 billion at the end of 2013 (KZT1,560.3 billion of which is at the parent level and KZT523 billion guaranteed by the parent), SK is the largest corporate borrower in Kazakhstan.
SK's 'b+' SACP incorporates a one-notch positive adjustment for our comparable rating analysis. This reflects our view of SK's ongoing state support, including access to long-term financing from the government and priority access to oil assets that are being sold in Kazakhstan.
S&P views SK's liquidity as "adequate," with the ratio of liquidity sources to liquidity uses above 1.2x at the consolidated level. The group has sizable cash balances and enjoys access to long-term funding from the government for investments and acquisitions (for example, SK recently financed the acquisition of a KZT255 billion stake in mining company Kazzink and a $1.3 billion stake in the Ekibastuz power stations with bonds purchased by the national bank).
The negative outlook reflects S&P's outlook on the long-term sovereign ratings on Kazakhstan, based on our expectation that we are unlikely to change S&P's assessment of SK's critical role for and integral link with the government.