Fitch assigns final rating at BBB- to bonds KZP06Y10B660 (KZ2C00002020, MREKb7) of Mangistau Electricity Distribution Network Company

24.05.13, 12:04
/Fitch Ratings, London-Moscow, May 22, 13, heading by KASE/ – Fitch Ratings has assigned Mangistau Electricity Distribution Company JSC's (MEDNC) KZT1,700m 8% domestic bond due 2023 a final local currency senior unsecured 'BBB-' rating. The rating is in line with MEDNC's Long-term local currency Issuer Default Rating (IDR) of 'BBB-', which has a Stable Outlook, as the bond will be direct and unsecured obligations of the company. A full list of MEDNC's ratings is below. The proceeds of the bond issue will be used by the company for financing its investment programme for 2013-2015. KEY RATING DRIVERS – State Support MEDNC's ratings are linked to those of Kazakhstan (Long-term foreign and local currency IDRs of 'BBB+'/Stable and 'A-'/Stable, respectively), and notched down by three levels to reflect that little indication has been given by MEDNC's state-owned parent, JSC Samruk-Energy (S-E, 'BBB'/Stable), that it will provide timely financial assistance to MEDNC in case of need. The notching reflects the fact that S-E has not provided tangible financial assistance to MEDNC in the past three years. The dividend payout ratio to S-E from MEDNC was set back to 50% of net profit (or KZT83m) for 2011 from 100% of net income (or KZT64m) for 2010, which management expects to remain the case over the medium term. Fitch believes that this will not put significant pressure on the rating. Fitch views MEDNC's standalone business and financial profile as commensurate with a weak 'BB-' rating. S-E does not view MEDNC as a strategic investment but is not actively pursuing a reduction of its stake in MEDNC. The ratings are based on Fitch's assumption that S-E will retain at least majority ownership of MEDNC over the medium term. – Near-Monopoly Position MEDNC's credit profile is supported by its near-monopoly position in electricity transmission and distribution in the Region of Mangistau, one of Kazakhstan's strategic oil & gas regions. It is also underpinned by prospects for economic development and expansion in the region, in relation to oil & gas and transportation, and a cost-plus-based tariff mechanism under which MEDNC operates. The company also benefits from limited foreign exchange exposure and absence of interest rate risks. – Small Scale, High Customer Concentration The ratings are constrained by MEDNC's small scale limiting its cash flow generation capacity, high exposure to a single industry (oil & gas) and, within that, high customer concentration. The latter is somewhat mitigated by the state ownership of major customers (Ozenmunaigaz and Kaz GPZ are 100% subsidiaries of KazMunaiGaz National Company; and Mangistaumunaigas and Karazhanbasmunai are 50%-owned by KazMunaiGaz National Company) and by prepayment terms under distribution agreements. – Stable Cash Flow From Operations Expected Fitch expects MEDNC to continue generating solid and stable cash flow from operation over 2013-2016. Free cash flows are likely to turn negative in 2013 and onwards, due to substantial capex plans. For 2013, Fitch estimates MEDNC's cash flow from operations at about KZT1.7bn, before capex (KZT3bn) and dividends (KZT167m). – Capex-Driven Leverage Increase Expected MEDNC's funds flow from operations (FFO) adjusted leverage for 2012 improved to 1.4x from 2.2x at end-2011. This ratio is expected to remain below 3x in 2013-2014 before increasing to around 3x in 2015, driven by an increase in capex. FFO interest cover also increased to 4.2x at end-2012 from 3.6x at end-2011. Fitch expects interest cover to remain in the low single-digit territory. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: – A positive change in Kazakhstan's ratings, provided the link between MEDNC and the sovereign does not weaken. – Stronger links with the sovereign demonstrated by unexpected explicit state support. – Enhancement of business profile, such as diversification and scale with only modest increase in leverage. Negative: Future developments that could lead to negative rating action include: – A negative change in Kazakhstan's ratings. – Reduction of S-E's stake to less than 50% provided that a new shareholder does not offer meaningful financial support or capex funding. – Deterioration in MEDNC's FFO adjusted leverage to 4x or above and FFO interest cover to 2x or below on a sustained basis. Liquidity & Debt Structure – Manageable Liquidity Fitch views MEDNC's liquidity as manageable, comprising solely cash as the company does not have any available credit lines. At end-2012, MEDNC's cash balance of KZT1.2bn was sufficient to cover short-term maturities of KZT1.1bn. Cash balances are mostly held in local currency with a domestic bank, which is a concern. At end-2012, most of MEDNC's debt was represented by two unsecured fixed-rate bonds of KZT800m each with maturity in 2013-2014. The rest of the debt is represented by 25-year interest-free loans provided until 2009 by MEDNC's customers to co-finance new network connections. The expected capex and hence negative free cash flow in 2013 will partially funded from the proceeds of the new KZT1.7bn bond. FULL LIST OF MEDNC's RATINGS Long-term foreign currency IDR: 'BB+', Outlook Stable Long-term local currency IDR: 'BBB-', Outlook Stable National Long-term rating: 'AA(kaz)', Outlook Stable Foreign currency short-term IDR: 'B' Foreign currency senior unsecured rating: 'BB+' Local currency senior unsecured rating: 'BBB-'. Contacts: Principal Analyst Oxana Zguralskaya, Associate Director+7 495 956 7099 Supervisory Analyst Josef Pospisil, Senior Director +44 20 3530 1287 Committee Chair Angelina Valavina, Senior Director +44 20 3530 1314 Media Relations: Julia Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2013-05-24]