S&P downgrades ratings of KazTransOil from "ВВВ-" to "ВВ+", outlook negative

/Standard & Poor's, Moscow, February 19, 15, KASE heading/ Standard & Poor's Ratings Services said that it lowered its long-term corporate credit ratings on Kazakhstan-based oil pipeline operator KazTransOil (KTO) to 'BB+' from 'BBB-'. The outlook is negative. The rating actions follow the downgrades of Kazakhstan on Feb. 9, 2015 (see "Kazakhstan Long-Term Ratings Lowered To 'BBB' From 'BBB+' Following Oil Price Decline; Outlook Negative," published on RatingsDirect) and KazMunayGas NC JSC(KMG) on Feb. 16, 2015 (see "Kazakhstan-Based Oil Company KazMunayGas Ratings Lowered To 'BB+' After Sovereign Downgrade; Outlook Negative"). The downgrade of KTO reflects our view that its rating is capped at the level of that on KMG, KTO's status as a "strategically important" subsidiary of the KMG group, and our view that there is a high likelihood that KTO would receive timely and sufficient extraordinary support in the event of financial stress. We assume that this would likely come directly from the government, rather than from the parent. Therefore, we determine the corporate credit rating on KTO based on its stand-alone credit profile (SACP) plus uplift for potential government support. In accordance with our group rating methodology, the rating on KTO is currently capped by the rating on its parent, KMG. We currently assess KMG's SACP as 'b'. KTO's "strategically important" status within the KMG group and its importance to the government of Kazakhstan are underpinned, in our view, by the company's role as the main oil pipeline network operator in the country. We consider KTO's role for the government to be "very important" and the link between the company and the government to be "strong," albeit indirect. We currently assess KTO's SACP as 'bb+' based on our "fair" business risk profile and "modest" financial risk profile assessments of the company. KTO has a solid market position and limited competiti were to undertake new investment projects requiring significant external borrowing, resulting in weakened credit measures (for instance, the debt/EBITDA ratio sustainably exceeding 1.5x without plans from the company to improve metrics), or if we were to see substantial unfavorable changes in new contracts with customers. However, we note that if the local currency sovereign rating on Kazakhstan stays at 'BBB', KMG's rating remains 'BB+', and our views of KTO's likelihood of state support and group status are unchanged, we would have to revise the SACP of KTO down to as low as 'b+' to trigger the rating downgrade. That might stem from a substantial increase in leverage on the back of heavy investments or dividends to levels commensurate with aggressive financial risk profile (with debt/EBITDA exceeding 4x, for instance) or a significant deterioration in liquidity, which is currently not a part of our base-case scenario. Indications of weaker support or negative interference from the parent or the state could also put pressure on the rating. The rating on KTO does not currently benefit from any uplift for the government support as its SACP is 'bb+', so any downgrade following such negative interference would be the result of weaker credit metrics. Upside scenario We would be unlikely to revise the outlook on KTO back to stable unless we took a similar action on the parent company. Primary Credit Analyst: Sergei Gorin, Moscow (7) 495-783-4132; sergei.gorin@standardandpoors.com Secondary Contact: Elena Anankina, Moscow (7) 495-783-4130; elena.anankina@standardandpoors.com [2015-02-20]