S&P downgrades ratings of Agricultural credit corporation (Kazakhstan)

/Standard & Poor's, Moscow, December 21, 09, Standard & Poor's English translation, KASE headline/ - Standard & Poor's Ratings Services said today that it had lowered its long-term issuer credit and Kazakhstan national scale ratings on Kazakh Agrarian Credit Corp. (KACC), a state-owned provider of subsidized credit to agricultural and nonagricultural businesses in rural areas throughout the Republic of Kazakhstan (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A-3; Kazakhstan national scale 'kzAAA'), to 'BB' from 'BB+', and to kzA+' from 'kzAA-'. The ratings, including the 'B' short-term issuer credit rating, remain on CreditWatch with negative implications, where they were placed on June 20, 2009. "The downgrade reflects that, contrary to our expectations, KACC has not finalized its negotiations on its $136 million loan with a covenant breached in July," said Standard & Poor's credit analyst Boris Kopeykin. The standstill on these negotiations weighs negatively on our assessment of the likelihood of extraordinary government support. We believe that the government is not paying as much attention as we would have expected to the rapid resolution of the issue. We also believe that pressure on KACC to finalize the deal has loosened. We have therefore reviewed our assessment of the importance of KACC's role for the Kazakh government, which we now consider as "important" instead of "very important". This in turn affects our assessment of the likelihood of timely and sufficient extraordinary support from the Kazakh government to KACC, which we now assess as "high" rather than "very high". The ratings continue to be constrained by the largely untested quality of KACC's rapidly expanding loan portfolio in Kazakhstan's difficult operating environment, and by KACC's high lending concentration and foreign currency risks. KACC's very low balance-sheet liquidity also constrains the ratings. The ratings are supported by significant ongoing state support to KACC, and high capitalization. "The ratings remain on CreditWatch because Commerzbank might demand immediate repayment of the large $136 million loan because of a breached covenant," said Mr. Kopeykin. Standard & Poor's aims to resolve the CreditWatch placement on completion of KACC's discussions with Commerzbank, which KACC reportedly intends to finalize soon, and on our analysis of all the new terms and conditions of the loan. If KACC and Commerzbank agree on a new and gradual repayment schedule for the loan, or if the government provides timely and sufficient support for an early repayment, then we are likely to affirm the ratings on KACC at the current level with a stable outlook, after we update our analysis of KACC's liquidity risk and stand-alone credit profile. "However, if Commerzbank accelerates the loan, and in such case the government fails to provide sufficient support on a timely basis, it could default on this obligation," added Mr. Kopeykin. This would in turn result in our downgrading KACC to 'SD' (selective default). We continue to consider this scenario to be unlikely, given the government's repeated statements indicating support for KACC, as well as tangible signs of support. However, the probability of such a scenario is increasing because the negotiations have already taken much longer than we initially expected Related research: - Enhanced Methodology And Assumptions For Rating Government-Related Entities, June 29, 2009 Contacts: Boris Kopeikin, Moscow, 7 (495) 783-40-62 Ekaterina Trofimova, Paris, 33 (1) 44-20-67-86 Analysts e-mails: boris_kopeykin@standardandpoors.com ekaterina_trofimova@standardandpoors.com PublicFinanceEurope@standardandpoors.com [2009-12-22]