Fitch affirms Samruk-Energy ratings, outlook stable

/Fitch Ratings, Moscow, December 24, 15, KASE heading/ – Fitch Ratings has affirmed Kazakhstan-based JSC Samruk-Energy's ratings, including its Long-term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-', and foreign-currency senior unsecured rating of 'BB+'. The Outlooks on the long-term ratings are Stable. The full list of rating actions is provided at the end of this commentary. The affirmation reflects strong strategic and operational ties with the Kazakh state and our expectation that the government would provide timely support to Samruk- Energy to meet and service its liabilities, if required. We expect the company's standalone credit profile to be under pressure from substantial capex, continued tenge depreciation and potentially adverse tariff developments. KEY RATING DRIVERS Top-Down Minus Two Notches We apply a two-notch differential between the rating of Samruk-Energy and the state (BBB+/Stable). We continue to view the operational and strategic links between Samruk-Energy and ultimately the state as strong, which supports the application of the top-down rating approach. The strength of the ties is underpinned by the company's strategic importance to the Kazakh economy as the company controls about 38% of total installed electricity generation capacity and 36% of total coal output in the country. The strength of ties is also supported by the state's approval of the company's strategy and capex programme, and by tangible financial support in the form of equity injections, asset contributions, subordinated loans and subsidies. The government demonstrated its support in November 2015. Wholly state-owned sovereign wealth fund Samruk-Kazyna (BBB+/Stable) reduced the interest rate on the KZT100bn loan it provides to Samruk-Energy from 9% to 1%. The loan will also be subordinated to all other unsecured obligations of Samruk-Energy. This measure will help the company meet the 5.0x debt/EBI eration tariff growth for 2016-2018 and lower capex spending in 2018-2019. Asset Privatisation Samruk-Energy is privatising its nine subsidiaries. The company has so far sold its 50% stake in Zhambylskaya GRES for KZT2.4bn. Under the state privatisation programme, in 2016 the company should sell its power distribution assets (MEDNC and VK REK including supply company Shygysenergotrade), and a generation power plant (Aktobe CHP). It also plans to privatise one more distribution company, Alatau Zharyk Company, power supply company AlmatyEnergosbyt, Tegis Munay and the large Almaty generation plant in 2H16- 2017. The company expects to use privatisation proceeds for a Eurobond repayment in December 2017. The rating impact of asset privatisation would depend on the sale prices achieved. Nine assets earmarked for privatisation contributed around 68% to revenue and 30% to EBITDA in 2014. They had a relatively low debt burden of KZT14bn. Samruk-Energy's profitability should improve after the disposals as it will retain its highly profitable hydro power plants and Ekibastuz GRES-1. The leverage impact will be neutral if the company achieves at least 50% of the expected price. Ambitious Debt-Funded Capex Samruk-Energy has a substantial capex programme of KZT266bn for 2015-2018. As a result, we expect its free cash flow to remain significantly negative for 2015-2018. However, if the tariffs for Samruk-Energy's generation subsidiaries are frozen for 2016-2018 the government may revise the company's capex programme downward. Weak Standalone Profile We view Samruk-Energy's standalone profile as commensurate with the mid 'B' rating category, significantly below the government-supported IDR. The main constraints on its credit profile are its operating and regulatory environment, with exposure to FX resulting in weakening of its credit metrics. In view of the tenge depreciation, ambitious capex plans, 30% dividend pay-out and a potential tariff freeze for 2016-2018, we expect Samruk-Energy's funds from operations (FFO) adjusted gross leverage to remain at around 6.7x on average in 2015-2019, and its FFO fixed charge cover to deteriorate to below 3x by 2017. Prior-Ranking Debt The ratio of secured and prior-ranking debt at operating company level is below Fitch's threshold of 2x of EBITDA, at around 1.8x of the group's 2015 EBITDA projected by Fitch. However, we continue to notch the foreign- and local-currency senior unsecured ratings down by one level from Samruk-Energy's Long-term Foreign-and Local-Currency IDRs, respectively, due to the lack of clarity and consistency in its financial policy and group debt management, and uncertainties associated with planned asset disposals. KEY ASSUMPTIONS Fitch's key assumptions in its rating case for Samruk-Energy include: - 0% tariff growth for 2016-2018 - Electricity production to increase below GDP growth rate - Inflation-driven cost increase (including coal) - Interest rate of 1% for KZT100bn subordinated loan from Samruk-Kazyna - 30% dividend payout ratio - Part of capex postponed from 2016-2017 and higher than management forecasts for 2018-2019 - 40% haircut to expected proceeds from privatisation of non-core subsidiaries in 2016 - second-wave privatisation (Almaty power station and Alatau Zharyk Company) excluded from forecasts due to high level of uncertainty RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Positive sovereign rating action - Strengthening of legal ties (eg state guarantees for a larger portion of the company's debt and/or cross default provision) - A clearly defined debt-management policy that provides for a centralised debt- management function, which would be positive for senior unsecured ratings Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Negative sovereign rating action - Diminishing or irregular state support Fitch outlined the following sensitivities for the sovereign rating of Kazakhstan, Samruk-Energy's ultimate parent, in its Rating Action Commentary of 30 October 2015: The following risk factors individually, or collectively, could trigger negative rating action: - Policy mismanagement and/or prolonged low oil prices leading to a weakening in the sovereign external balance sheet - Renewed weakness in the banking sector, which leads to contingent liabilities for the sovereign - A political risk event The following factors, individually or collectively, could result in positive rating action: - Moves to strengthen monetary and exchange rate policy - Steps to reduce the vulnerability of the public finances to future oil price shocks, for example by reducing the non-oil deficit, currently estimated at more than 9% of GDP - Substantial improvements in governance and institutional strength LIQUIDITY AND DEBT STRUCTURE At end-November 2015 Samruk-Energy's available cash and cash equivalents were KZT54bn, comfortably covering December 2015 maturities of KZT10.1bn. Maturities in 2016 of KZT52.5bn would be covered by a mix of cash balances and operating cash flow. However, the investment programme for 2016 is not yet fully funded: around KZT17.7bn of new debt would need to be raised to cover planned projects. The company's USD500m Eurobond matures in December 2017, and Samruk-Energy is working on various refinancing strategies. Almost all the group's cash position is held at domestic banks. Although we believe the company's access to liquidity for daily operations is likely to be adequate, its full access to all the cash held at Kazakh banks may be limited. We therefore focus on gross leverage ratios in our analysis rather than net figures. At end-November 2015, 60% of the group's cash was held at the holding company level. FULL LIST OF RATING ACTIONS Long-term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable Long-term Local-Currency IDR affirmed at 'BBB'; Outlook Stable Short-term Foreign-Currency IDR affirmed at 'F3'; Long-term National Rating affirmed at 'AA+(kaz)'; Outlook Stable Foreign-currency senior unsecured rating affirmed at 'BB+' Local-currency senior unsecured rating assigned at 'BBB-' National senior unsecured rating assigned at 'AA(kaz)' Contact: Principal Analyst Elina Kulieva Associate Director +7 495 956 9901 Supervisory Analyst Maria Fassakhova Director +44 20 3530 1746 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Arkadiusz Wicik Senior Director +48 22 338 62 86 Media Relations in Moscow: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908/9901, Email: julia.belskayavontell@fitchratings.com. [2015-12-31]