S&P affirms its "BB+" corporate credit rating and its "kzAA-" Kazakhstan national scale rating on rail group Kazakhstan Temir Zholy; outlook stable

/Standard & Poor's, London, March 24, 06/ - Standard & Poor's Ratings Services said today that it affirmed its 'BB+' corporate credit rating and its kzAA-' Kazakhstan national scale rating on rail group Kazakhstan Temir Zholy (KTZ). The outlook is stable. The ratings reflect KTZ's aggressive financial policy, and significant medium- term borrowing requirements in order to maintain investment in railroad infrastructure and rolling stock. Additional credit risks are presented by an evolving, opaque, and politicized regulatory regime, and competition from oil pipelines. These risks are mitigated by: KTZ's strong competitive position in the national transportation sector; the continued vertical integration of monopoly railroad infrastructure and freight transport operations (which has remained unchanged during the ongoing rail sector reform); good medium-term prospects for rail traffic growth (with the exception of crude); and KTZ's strategic importance to, and support from, the government of the Republic of Kazakhstan (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A- 3; Kazakhstan national scale kzAAA/-/-). "We expect KTZ's financial profile to deteriorate over 2006-2010, in view that planned capital expenditure investment requires additional borrowing," said Standard & Poor's credit analyst Eugene Korovin. "Cash flow protection will likely weaken substantially from the currently strong level, although this should remain consistent with the ratings." KTZ's currently strained liquidity should improve following the placement of a proposed eurobond of up to $850 million in April 2006. Furthermore, the timely equalization of internal freight tariffs with international tariffs, continued growth of rail traffic, and more efficient cost control will improve profitability. These factors should also mitigate the financial risk resulting from a sharp increase in total debt on the eurobond placement, and the potential loss of most of KTZ's crude oil traffic and revenues to pipelines. "Delayed tariff increases, or a failure to curb increasing operating costs, would impair cash flow protection beyond a level consistent with the current rating," added Mr. Korovin. [2006-03-24]