FITCH REVISES KAZAKHTELECOM'S OUTLOOK TO NEGATIVE

/Fitch Ratings, London, Moscow, November 12, 08/ - Fitch Ratings has today changed JSC Kazakhtelecom's (Kaztel) Outlook to Negative from Stable. Its foreign currency Long-term Issuer Default rating (IDR) is affirmed at 'BB' and the Short-term foreign currency IDR at 'B'. Fitch has also assigned the company a National Long-term rating of 'A(kaz)' with a Negative Outlook. The change of Outlook reflects Fitch's concerns over continued significant negative free-cash-flow generation. This is driven by Kaztel mobile subsidiary's, MTS, rapid rate of cash utilisation and Kaztel's high capital expenditure relative to its EBITDA generation. Although Kaztel has undertaken measures to cut capital expenditure, Fitch believes they are not significant enough to reverse negative free-cash-flow generation over the medium term. There continues to be uncertainty regarding the timeframe for MTS to reach EBITDA breakeven. Fitch appreciates the cost control and capex reduction measures undertaken by Kaztel, but takes the view that the risk of the subsidiary under-performing has risen due to increased competition in the mobile market and a worsening macroeconomic environment. In Fitch's view the subsidiary will have a significant negative impact on Kaztel's performance metrics such as leverage, free cash-flow and EBITDA. Fitch expects leverage (net debt/EBITDA including associate dividends) to increase to 1.4x-1.5x in 2008 from 1.1x at end-2007. In 2009-2010 there is a risk of further leverage growth to above 1.9x, which would be the maximum for the current rating level. Kaztel's overall business is fairly robust and shows resilience in the economic downturn evidenced in Kazakhstan (rated 'BBB-' (BBB minus), Outlook Negative) since 2007. The incumbent's LTM to Q308 results show healthy EBITDA performance, with a consolidated EBITDA margin of 40.1% and a consolidated operating EBITDA margin of 33%. However, additional regulatory tariff reduction measures in the fixed-line voice segment and MTS's under-performance are likely to put pressure on Kaztel's margins. Kaztel's available liquidity sources are adequate to meet existing short-term maturities in 2008-2009. However, the incumbent faces a major refinancing risk in July 2010 when its largest bank debt facility of USD350m matures. In Fitch's view, given existing banking sector instability in Kazakhstan, Kaztel's rating can be sustained if the company takes refinancing measures in advance, i.e. in 2009. In the agency's opinion the October 2008 merger of Kaztel's parent, SAMRUK, and Kazyna (both are state-owned holding companies) followed by a capital injection from the state of USD10bn to support the economy may benefit Kaztel as well. Kaztel is a major fixed-line operator in Kazakhstan with dominant market shares in fixed-line voice and broadband segments. The state holds an indirect 51% controlling interest through National Welfare Fund Samruk- Kazyna Contact: Zhanna Rozhkova, Moscow, Tel: +7 495 956 5570 Nikolai Lukashevich, +7 495 956 9901 Media Relations: Peter Fitzpatrick, London Tel: + 44 (0)20 7417 4364 Email: peter.fitzpatrick@fitchratings.com Alla Izmailova, Moscow Tel: +7 495 956 9903 Email: alla.izmailova@fitchratings.com [2008-11-13]