Moody's downgraded Corporate Rating of National Company KazMunayGaz (Kazakhstan) to Baa3, outlook Stable
01.11.10 16:58
/Moody's Investors Service, Moscow, October 29, 10, KASE headline/ - Moody's
Investors Service has today undertaken a series of rating actions related to JSC
National Company KazMunayGas ("KMG NC" or "the group") and its subsidiaries
in conjunction with the downgrade of the group's corporate family rating (CFR)
by one notch to Baa3; and the change of outlook to stable from negative. These
rating actions are as follows:
(i) The rating of KMG NC's senior unsecured notes has been lowered to Baa3
from Baa2;
(ii) The ratings of four subsidiaries of KMG NC have been changed as follows:
- JSC KazMunaiGas Exploration Production (KMG EP)
Issuer rating downgraded to Baa3 from Baa2. Outlook changed to stable from
negative.
- JSC KazTransOil (KTO)
Issuer ratings downgraded to Baa3 from Baa2. Outlook changed to stable from
negative.
- JSC KazTransGas (KTG)
Issuer rating downgraded to Baa3 from Baa2. Outlook changed to stable from
negative.
- JSC Intergas Central Asia (ICA), a subsidiary of KazTransGas
Issuer ratings downgraded to Baa3 from Baa2. Outlook changed to stable from
negative.
Moody's considers KMG NC to be a Government-Related Issuer (GRI). The
rating agency has downgraded the group's Baseline Credit Assessment (BCA) to
13 from 12 (corresponding to Ba3 and Ba2 ratings on the global rating scale,
respectively). The support and dependence levels remain unchanged.
RATINGS RATIONALE
The downgrade of KMG NC's CFR reflects Moody's assessment of the group's
weakening financial profile, a result of the potential slow-down in cash flow
generation that has led to weaker-than-expected leverage metrics in 2010-2012.
The assessment reflects: (i) uncertainties about the level of dividends
available from the group's affiliates , given the potential increase in capex
spending at the affiliates' level; (ii) the substantial capex commitments of the
group, with the bulk of investment directed at green-field projects that will
not generate immediate cash inflows; and (iii) the expected increase in the
group's consolidated net debt position in the next three years.
Moody's now considers it unlikely that KMG NC will be able to demonstrate the
recovery in financial metrics commensurate with a Baa2 rating. Specifically,
these requirements include an adjusted retained cash flow (RCF)/net debt ratio
above 40% and a total consolidated debt/consolidated EBITDA ratio below 2.5x
during 2010-2012.
Therefore, the Baa3 rating and stable outlook reflect Moody's expectation that
over the course of 2010-2012, KMG NC will maintain (i) an adjusted RCF/net
debt ratio of 30%-35%; and (ii) a total consolidated debt/consolidated EBITDA
ratio of 2.5x-2.8x.
Notwithstanding the re-calibration of KMG NC's short-term financial outlook, the
issuer rating of the group continues to reflect: (i) its strategic importance to
the Kazakh economy; (ii) the large scale of the group's asset base; (iii) the
positive track record and good growth prospects of the group's exploration and
production (E&P) business, specifically for KMG EP, and the Tengiz and Kashagan
oil projects; and (iv) the significant value of the oil and gas transportation
segments. In Moody's view, these segments provide KMG NC with favorable
diversification into utility-type earnings, supported by relatively stable and
transparent regulations.
At the same time, the rating is constrained by KMG NC's: (i) leveraged financial
profile; (ii) track record of aggressive acquisition policy historically, and
significant investment programme (which needs to be supported by additional
borrowing), although flexibility exists to reduce investments due to a
discretionary element; (iii) weak refining margins; (iii) complex corporate
structure that impacts the visibility of cash flows; and (iv) exposure to
country-related risk factors.
The rating downgrades of the four subsidiaries of KMG NC are principally driven
by the lowering of the group's issuer rating. However, the downgrades also
reflect Moody's concern that the financial metrics and liquidity positions of
the individual subsidiaries might deteriorate as a result of them providing
support to the parent company. This support could come in the form of increasing
upstream dividends to help fund the group's other businesses and activities and
help mitigate lower dividend inflows from the affiliates.
The stable outlook on KMG NC's ratings reflects its strategic importance to the
Kazakh economy, as well as Moody's expectation that the group will be able to
maintain an annual adjusted RCF/net debt ratio above 30% in the next two to
three years. The outlook is also supported by a stable liquidity position of the
group, which recently benefitted from the reduction of its exposure to the BTA
bank as a result of the transaction with the group's shareholder Samruk-Kazyna.
Lastly, the group's access to the capital markets demonstrated historically
provides additional comfort.
Based on the updated financial guidance, Moody's does not foresee upward
pressure being exerted on the ratings of KMG NC in the next 12-18 months.
However, positive pressure would be exerted on the ratings if the group's
financial performance recovers, reflected in stronger financial metrics, with
(i)leverage below 2.5x on a total consolidated debt/consolidated EBITDA basis;
and (ii) an annual adjusted RCF/net debt ratio above 40% on a sustainable basis.
An upgrade would also require a strong improvement in the performance of KMG
NC's downstream segment and a good liquidity position -- supported by access
to committed lines, strong operating cash flow generation to meet major capex
projects and proactive management of the group's funding requirements. While
Moody's notes the considerable progress achieved by the group to date with
regard to improving transparency and availability of information, clear guidance
regarding longer-term growth targets will be required to support an upgrade.
The ratings of KMG NC could be downgraded if the group's financial position
deteriorated further, such that it were unable to maintain: (i) an adjusted
RCF/net debt ratio above 30% in 2010-2012; (ii) a debt/total capitalisation
ratio below 50%; and (iii) a total consolidated debt/total EBITDA ratio below
3.0x, which would also imply a material reduction in the covenant headroom. Any
unforeseen change in the currently favorable political and regulatory landscape
and the level of state support could also warrant a reassessment of the GRI
rating factors, which in turn may exert negative pressure on KMG NC's ratings.
The group's ratings are currently equally influenced by its stand-alone credit
and the credit quality of the sovereign. Thus, a downgrade of the sovereign
rating of Kazakhstan could trigger a downgrade of KMG NC's ratings.
Moody's last rating action on KMG NC was implemented on 16 April 2010, when
the rating agency affirmed the group's Baa2 CFR (and the ratings on its
subsidiaries) and assigned a negative outlook on all ratings. On 11 June 2010,
Moody's assigned provisional (P)Baa2 ratings to domestic notes issued by KMG
NC .
The principal methodologies used in rating KazMunayGas NC JSC and its
subsidiaries were Global Integrated Oil & Gas Industry published in November
2009, and Government-Related Issuers: Methodology Update published in July
2010. Other methodologies and factors that may have been considered in the
process of rating this issuer can also be found on Moody's website.
Headquartered in Astana, Kazakhstan, KMG NC is a wholly state-owned (through the
SamrukKazyna holding company), vertically integrated oil and gas operator with
core operations in E&P, refining, domestic oil and gas transportation, and the
marketing and trading of oil and petroleum products. In 2009, the group
generated around USD10.8 billion in revenues and EBIT of USD3.3billion.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public information,
confidential and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available on the
issuer or obligation satisfactory for the purposes of maintaining a credit
rating.
MOODY'S adopts all necessary measures so that the information it uses in
assigning a credit rating is of sufficient quality and from sources MOODY'S
considers to be reliable including, when appropriate, independent third-party
sources. However, MOODY'S is not an auditor and cannot in every instance
independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last
rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time
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provides a date that it believes is the most reliable and accurate based on the
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and the definition of default and recovery.
Moscow
Sergei Grishunin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
London
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
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[2010-11-01]