Kazakhstan Rail Company KTZ Proposed Notes Issue Rated 'BB+'

/Standard & Poor's, Moscow, April 21, 06/ - Standard & Poor's Ratings Services said today it assigned its 'BB+' long-term senior unsecured debt rating to the proposed notes issue by Kazakhstan Temir Zholy Finance B.V., a finance company jointly owned by Kazakhstan-based national railroad monopoly Kazakhstan Temir Zholy (KTZ; BB+/Stable/-; Kazakh national scale kzAA-) and its 100% subsidiary Kazzheldortrans (KZDT). The size (up to $850 million) and maturity of the notes issue will be determined at placement. The rating on the notes is the same as the corporate credit rating on KTZ, reflecting that the notes will be irrevocably, unconditionally, jointly, and severally guaranteed by KTZ and its two major operating subsidiaries, KZDT and JSC Locomotiv (Locomotiv), and will rank equal to the group's other senior unsecured obligations. KZDT and Locomotiv are two major subsidiaries of KTZ that operate the freight wagons and locomotive fleets, respectively, of the group. The covenant package of the notes includes a negative pledge, in addition to restrictions on mergers and consolidation, the disposal of assets by the issuer and each guarantor, and changes in the business of the group. The transaction is not expected to include financial covenants. The noteholders are also entitled to claim early redemption if there is a change of control over the companies by the government of Kazakhstan; if there are court judgments for the payment of money over $25 million (among other events of default); or if government intervention results in the condemning, seizing, or appropriation of a substantial portion of revenues or assets of the group. The ratings on KTZ continue to reflect the group's aggressive financial profile, which factors in the need for significant medium-term borrowing to invest in rail infrastructure and rolling stock. An evolving, opaque, and politicized regulatory regime and competition from oil pipelines present additional credit risks. These risks are mitigated by KTZ's strong competitive position in the national transport sector; the continued vertical integration of monopoly rail infrastructure and freight transport operations; good medium- term prospects for rail traffic growth (with the exception of crude oil transport); and KTZ's strategic importance to, and support from, the Republic of Kazakhstan (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A-3). [2006-04-21]