S&P affirms long-term credit rating of KEGOC at level "BB+"; outlook "Positive"
11.11.14 12:19
/Standard & Poor's, Moscow, November 7, 14, heading by KASE/ – Standard & Poor's
Ratings Services said today that it has revised its outlook on Kazakhstan- based
state-owned electricity transmission monopoly Kazakhstan Electricity Grid
Operating Co. (JSC) (KEGOC) to positive from stable. At the same time, we
affirmed our 'BB+' long-term corporate credit rating.
We also affirmed the 'BB+' rating on KEGOC's senior unsecured bank loan from
the European Bank For Reconstruction And Development (EBRD). The recovery rating
is unchanged at '4', indicating our expectation of average (30%-50%) recovery in
the event of a payment default.
The outlook change reflects our view that KEGOC's credit ratios might strengthen
in the next 12 months following a tariff uplift in November 2014. As we
understand, the government has approved a beneficial tariff uplift for KEGOC's
services, including a 50% rise for transmission services. We think that this
will result in boosted cash flow generation and stronger leverage ratios, which
could lead us to positively reassess the company's financial risk profile,
putting it in the "significant" category.
We also note that there is a possibility of a parallel rise in capital
expenditure or a requirement to pay a superdividend to its parent, 100%
state-owned national welfare fund Samruk-Kazyna, which would cancel the
benefits of improved cash flow generation and hinder positive development of
the financial profile.
KEGOC's ratings are constrained by its short-term (one year) cost-plus-based
tariff system, which lacks predictability and transparency and does not
guarantee either full or timely cost recovery, as well as its aged asset
portfolio, high country risk, high financial leverage with 100% of debt
denominated in euros or U.S. dollars, and large investment program.
Supportive factors include strong ongoing support from the state, a monopoly
position in the stable electricity transmission business, which we consider to
have fairly low operating risk because of its regulated earnings profile, as
well as minimal dividend pressure and a long-term maturity profile.
We regard KEGOC as a government-related entity (GRE). Our rating on KEGOC
incorporates our assessment of a "very high" likelihood of timely and sufficient
extraordinary government support for the company, based on our assessment of
KEGOC's:
- "Very important" role for Kazakhstan's government, given the company's
strategic importance as a monopoly provider of essential electricity
infrastructure; and
- "Very strong" link with the government, which fully owns KEGOC, currently
guarantees about 42% of KEGOC's debt (and possibly any new debt), and has a
history of injecting equity to cover the company's liquidity shortfalls.
We currently don't expect any deterioration in the likelihood of extraordinary
government support for KEGOC following the partial IPO planned for December
2014. We assume that only a minor stake (10%-15%) will be placed, and the
government will retain incentives and instruments to financially support KEGOC
in case of need.
The positive outlook reflects our expectation that positive tariff adjustments
will boost KEGOC's cash flow generation. This could lead us to reassess the
company's financial risk profile to "significant," raising its stand-alone
credit profile (SACP) to 'b+', if we believed that KEGOC's main credit metrics
would improve on a sustainable basis.
In accordance with our criteria for GREs, a revision of the SACP to 'b+' would
result in a one-notch upgrade, all else being equal.
We could raise the ratings within the next 12 months if we believe that KEGOC's
financial metrics will improve to a level we consider in line with a
“significant” financial risk profile for the company, including debt to EBITDA
below 4.0x and FFO to debt above 20% on a sustainable basis. An upgrade would
also rely on KEGOC maintaining an “adequate” liquidity position, and no downward
changes in our assessment of a “very high” likelihood of extraordinary state
support for KEGOC or our sovereign rating on Kazakhstan.
We could revise the outlook to stable if KEGOC fails to achieve stronger cash
flow generation and leverage ratios, or if a higher level of capex or excessive
dividends mitigate the positive developments in tariffs. A downgrade of
Kazakhstan by one notch or the likelihood of support falling to "high" would
also eliminate the positives stemming from the strengthening of the financial
risk profile.
Primary Credit Analyst:
Sergei Gorin, Moscow (7) 495-783-4132;
sergei.gorin@standardandpoors.com
Secondary Contact:
Alf Stenqvist, Stockholm (46) 8-440-5925;
alf.stenqvist@standardandpoors.com
Additional Contact:
Industrial Ratings Europe;
Corporate_Admin_London@standardandpoors.com
[2014-11-11]