Fitch assigns final rating at BBB- to bonds KZP06Y10B660 (KZ2C00002020, MREKb7) of Mangistau Electricity Distribution Network Company
/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
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-'
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
– 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
– 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
Positive: Future developments that could lead to positive rating actions
– 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
– 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-'.
Oxana Zguralskaya, Associate Director+7 495 956 7099
Josef Pospisil, Senior Director +44 20 3530 1287
Angelina Valavina, Senior Director +44 20 3530 1314
Julia Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901,