S&P granted to Kazakhtelecom long-term rating BB-

/REUTERS, Moscow, Feb 7, 02/ - International rating agency Standard & Poor's granted to Kazakhtelecom company long-term corporate credit rating at the level "BB-"; rating forecast is stable, is said in the report of the agency. Rating of Kazakhtelecom, 50% of which belongs to the state, first of all reflects dominating position of the company in highly profitable market of intercity and international telephone communications and also stable financial position of the company. Following is a press release provided by Standard & Poor's: NEW YORK, Feb 7 - Standard & Poor's today assigned its double-'B'-minus long-term corporate credit ratings to OJSC Kazakhtelecom (KTC), the 50% state-owned national telecommunications operator in the Republic of Kazakhstan (local currency BB+/Stable/B; foreign currency BB/Stable/B). The outlook is stable. The ratings on KTC primarily reflect the company's dominant position in profitable domestic long-distance and international telephony, where it has a legal monopoly in its most profitable business segments, as well as the high barriers to entry to the Kazakh fixed-line telecoms market. The company's sound financial profile further supports the ratings. In addition, Kazakhstan's improving macroeconomic results and KTC management's focus on rendering the company more efficient prior to future liberalization of the Kazakh telecoms market could have a positive impact on operating fundamentals in the medium term. KTC's main credit weaknesses are reflected by the low subscriber penetration rate of 12.3%, with low overall average revenue per user--about Kazakhstan Tenge (KZT) 1,600 ($11) per month in 2000--coupled with the significant challenges arising from the continuing high capital expenditure requirements to expand and upgrade the company's network in a geographically vast area. Other negative factors include foreign exchange risk, as most of the company's debt is denominated in foreign currency, and the company's high level of bad debt provisions, representing 8.4% of revenues in 2000. Also, regulatory requirements keep local tariffs at a level that renders local telephony unprofitable, and progress in tariff rebalancing will be necessary before partial liberalization of the market from 2003-2005, which will bring about an increase in competition. With revenues of KZT32.3 billion for the first nine months of 2001, compared with KZT26.3 billion the previous year, KZT holds a dominant position in the majority of services its provides, and has more than 90% of the market for domestic and international services in 2000. In addition to its core fixed-line businesses, the company has interests in the Kazakh mobile market by virtue of its 49% stake in leading GSM operator Kazakhstan GSM and its 50% stake in CJSC Altel. Both investments are accounted for on an equity basis. About 60% of KTC's revenues are derived from the international long- distance (ILD) and domestic long-distance (DLD) segments, contributing to an overall EBITDA margin of 33.8% in 2000. ILD is driven by termination fees from incoming traffic and an increase in transit traffic, while DLD is driven by increased minutes of use due to overall economic development and increased interconnection revenues with alternative operators, including mobile operators. Notwithstanding Kazakhtelecom's legal monopoly in DLD and ILD, these most lucrative segments are also the most competitive, as stand-alone operators are already permitted to offer limited services. Further liberalization of the telecom market from 2003 will increase competition and, although local tariffs and subscriptions are likely to be rebalanced upward in the future, growth of consolidated revenues is likely to slow. In addition, the expansion of mobile operators will deprive the company of some DLD and ILD traffic due to substitution of ixed-line-to-mobile traffic by mobile-to- mobile, although mobile-to-mobile traffic will still be carried on KTC's backbone network. Despite three years of sustained capital expenditures to modernize and expand its network, KTC retains a moderate capital structure, with net debt to capitalization of about 35% and net debt of KZT19.7 billion at year-end 2000, of which about 20% is foreign-denominated vendor finance debt. Free cash flow generation has been substantially negative since 1998. In the medium term, the company expects to maintain a high level of capital expenditures and plans to fund expansion with both internal and external funds. Nevertheless, Standard & Poor's expects KTC to start generating cash flow surpluses thanks to improved efficiency and higher revenues such as transit revenues. OUTLOOK: STABLE The ratings incorporate Standard & Poor's expectations that KTC will be able to execute its business plan successfully and will gradually improve its operating efficiency and cash flow generation. In addition, the ratings assume that regulation in Kazakhstan will remain generally favorable to its public operator, and will not result in a significant deterioration of KTC's credit measures through aggressive requirements in terms of network expansion.