Fitch assigns expected ratings to proposed Eurobonds of Eastcomtrans (Kazakhstan)

/Fitch Ratings, London/Moscow, April 5, 13, heading by KASE/ – Fitch Ratings has assigned Kazakhstan-based Eastcomtrans LLP's (ECT) expected secured Eurobond 'B(EXP)' rating and Recovery Rating of 'RR4'. The issue's final rating is contingent upon the receipt of final documentation conforming materially to information already received. The proceeds from the issue will be used to refinance ECT's existing bilateral loans and to purchase new fleet. Terms of the issue include a change of control clause and financial covenants including (i) the consolidated leverage ratio will not exceed 4x (3.2x at end-2012); (ii) the consolidated interest coverage ratio will exceed 2.5x (3.8x at end-2012); and (iii) the notes' collateral coverage should exceed 130%. The notes will be secured with a pool of rail wagons owned by ECT and leased out to its clients. The final rating will depend on ECT's ability to provide sufficient collateral, considering new wagons acquisition and the expected release of pledged wagons upon repayment of existing bank loans. KEY RATING DRIVERS The issue's ratings correspond to ECT's Long-term local currency Issuer Default Rating (IDR). This in turn is constrained by risks from rapid growth, a concentrated franchise with high, albeit declining, dependence on a single client, lumpy funding and corporate governance that is weak by international standards. On the positive side, the IDR reflects ECT's sound performance, comfortable liquidity, strong position in the Kazakh market of rolling stock lease and business prospects stemming from increasing domestic oil and gas production (76% of ECT's fleet are oil tanks and LPG wagons; for more details see the Full Rating Report on Eastcomtrans LLP). Fitch does not give uplift to the rating of the issue over the company's rating because the performance of the notes is closely linked to the company's performance (there is no mechanism allowing for the underlying secured assets and respective cash flows to be segregated from the rest of the company's assets and cash flows prior to potential default) and due to the company's high encumbrance of assets (92% at end- 2012), as essentially all of the company's obligations are secured. Also, although the issue of the notes is governed by English law, it may be difficult for the trustee (the security interests will be granted to the trustee rather than directly to the noteholders) to enforce the security, which is physically located in Kazakhstan. Due to uncertainties over the ability of creditors to enforce their rights, a 'soft cap' of 'RR4' exists on instrument ratings of issuers from Kazakhstan, in common with most other emerging markets. RATING SENSITIVITIES A further decrease in dependence on the single largest client and the extension of average contract terms, as well as a more diversified funding and stronger capitalisation could lead to an upgrade of ECT and hence of the issue. A large and unexpected decline in utilisation and lease rates, or a speculative acquisition of fleet leading to weaker credit metrics would be rating negative. The Recovery and issue ratings may also be downgraded if there is a substantial fall in rail wagon prices leading to a breach of covenants and potential acceleration of the issue and other debt reducing recovery prospects for the creditors. ECT has limited capacity to top- up collateral because of the high encumbrance. ECT was incorporated in 2002 and is domiciled in Kazakhstan. Its principal business activity is operating leases of rail wagons. After rapid growth of its fleet (to 9,782 wagons at end-2012) ECT owns about 8%-10% of the total fleet or 19% of Kazakhstan's private fleet and is the leading private fleet owner. ECT's ratings are as follows: Long-term foreign and local currency IDRs: 'B'; Stable Outlook National Long-term Rating: 'BB(kaz)'; Stable Outlook. Contacts Primary Analyst, Aslan Tavitov, Associate Director +7 495 956 7065 Secondary Analyst, Josef Pospisil, Senior Director +44 20 3530 1287 Committee Chairperson, Alexander Danilov, Senior Director +7 495 956 2408 Contacts for media: Julia Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2013-04-08]