Moody's upgraded rating of the company Kazakhstan Temir Zholy to "Ba1" from "Ba2"
10.02.03 00:00
/REUTERS, London, February 10, 03/ - Rating agency Moody's has
upgraded long-term rating of Kazakhstan Temir Zholy (Kazakhstan Raiway)
to "Ba1" from "Ba2", forecast of rating change is stable.
The rating upgrade occurred after upgrading of Kazakhstan sovereign rating
to "Baa3" from "Ba2" in September of 2002.
The rating upgrade is based on the critical dependence of the Republic of
Kazakhstan on the railway system, the strategic role of KTZ as the national
rail company and the 100% ownership of KTZ by the government, which is
expected to ensure continued strong governmental and regulatory support
going forward.
Below is the text of the agency's message in English:
(The following statement was released by the ratings agency).
LONDON, Feb 10 - Moody's Investors Service today upgraded to Ba1 from
Ba2 the long-term issuer rating of Kazakhstan Temir Zholy ("KTZ"), the
national railway company of the Republic of Kazakhstan. The rating upgrade
concludes a review initiated on 16 October 2002 following the upgrade of the
Republic of Kazkahstan's foreign currency ceiling for bonds and
government's foreign currency bonds to Baa3 from Ba2 in September 2002.
The outlook for the rating is stable.
The rating upgrade is based on the critical dependence of the Republic of
Kazakhstan on the railway system, the strategic role of KTZ as the national
rail company and the 100% ownership of KTZ by the government, which is
expected to ensure continued strong governmental and regulatory support
going forward. The rating also considers challenges arising from the ongoing
restructuring of KTZ, including the implementation of a new tariff-setting
policy, the intended liberalisation of the rail freight transport sector, KTZ's
key revenue source, and the evolving nature of corporate governance in
Kazakhstan.
Moody's notes that while the rating is related to the sovereign rating, it is
not explicitly linked to it and can move independently from adjustments in the
debt rating of the Republic of Kazakstan. According to Moody's, the rating of
KTZ reflects its close relations with the Republic of Kazakhstan and its
importance to the national economy, that should lend support to a favorable
regulatory tariff regime for KTZ also in the future. Despite the group's
reorganisation in 2002 from a Republican State Enterprise into a Closed
Joint Stock Company, KTZ remains a 'National Company' 100% owned by
the government and also effectively controlled by it, with no privatisation
move contemplated. Besides being among the largest taxpayers in the
country, the rail system is of critical importance to the economy of
Kazakhstan in view of the large size of Kazakhstan's territory and the
underdeveloped road infrastructure, accounting for 57% of total passenger
and 68% of freight turnover in 2001 respectively.
In particular, for bulk cargo there is no real alternative to railway, while
Moody's cautions that the build-out of the oil pipeline system in Kazakhstan
could pose a threat overtime to the volumes of oil transported by rail, KTZ's
most profitable export commodity today. Moody's notes that the rail sector in
Kazakhstan is undergoing an extensive restructuring project, that will
fundamentally change KTZ's business structure and the way the company is
generating revenues. The first stage of the restructuring plan involved the
reorganisation of KTZ from a 'Republican State Enterprise' into a 'Closed
Joint Stock Company', the divestiture of ancillary activities and the creation
of a 'Passenger Transportation Open Joint Stock Company' with 100% of
shares owned by KTZ. The second stage currently underway is supposed to
develop the competitive market in rail freight transportation and to transfer
the unprofitable passenger operations into a separate, government-owned
entity.
When fully implemented, KTZ primary responsibility will focus on the
management of the national rail infrastructure, while retaining an interest in
rail freight operations. It is supposed that KTZ will no longer derive the
majority of its revenues directly from the provision of freight services in
Kazakhstan (around 90% of KTZ's revenues currently), but will receive
infrastructure access tariffs and charges for the hire of locomotives to be
paid by independent rail operators. Nevertheless, it is intended that KTZ will
still receive about 75% of all revenues derived from the railway industry in
Kazakhstan through a new tariff-setting policy, for which the government has
expressed its full approval and which needs to be signed-off by the
Republic's Anti-Monopoly Agency overseeing KTZ's operations. Against this
background and recognising that many of the restructuring measures are yet
to be implemented, Moody's anticipates strong support from the government
to KTZ throughout and beyond the restructuring process.
In particular, the rating assumes that infrastructure access charges and
tariffs will be regulated in a way that adequately reflect KTZ's planned
investments, level of expenses, including debt interest, as well as provide
profits for the company -- also in a liberalised rail transportation market.
For this to happen, the implementation of the revised tariff scheme as laid out
above will be crucial to counterbalance any negative effects from the
introduction of competition in rail freight services. Moody's notes that
private competitors will likely be the group's existing large mining and oil
customers, so that the counterparty risk for KTZ is not expected to change.
KTZ's current debt levels are modest given the cash generative nature of the
group's freight operations (accounting for 90% of revenues) that have
resulted in limited external financing requirements in the past. The level of
investments are forecasted to increase over the next years in view of the
substantial backlog in infrastructure and rolling stock investments, with many
assets well into their useful lives, and the further build-out of the country's
rail transit routes. The recent freight tariff increases announced by the Anti-
Monopoly Agency are deemed to support KTZ in its undertakings. The stable
outlook for the rating expects no material change to the strengths of support
for KTZ and the successful implementation of the restructuring plan,
including the development of a new tariff setting policy, with no significant
detriment to KTZ's current financial position.
Moody's notes that the auditor's opinion in the 2001 annual report was
qualified citing the review of KTZ's activities from its inception in 1997 to
31 December 2001 by government agencies in 2002, which gave rise to certain
allegations against the group's previous top management relating to the
misappropriation of funds and the purchase of certain assets.
After discovering the facts, a new management team was appointed in
March 2002, who have started implementation of new effective methods of
corporate management. Measures taken include the appointment of an
independent registrator of the company, the creation of a separate internal
audit division as well as the centralization of money flows across the group.
The evaluation of financial and economic activities of the company in the
year 2002 will continue to be executed by Ernst&Young independent auditing
company. Closed Joint-Stock Company "National Company Kazakhstan
Temir Zholy," headquartered in Astana City, is the national railway company
of the Republic of Kazakhstan.
In 2001, the group generated total revenues of about US$1.0 billion and net
income of US$ 52 million, with total debt amounting to US$ 133 million.
[2003-02-10]