Baku, Azerbaijan, April 24
By Elena Kosolapova – Trend:
Standard & Poor's Ratings Services has affirmed its 'BB+' long-term corporate credit rating on Kazakhstan-based oil pipeline operator KazTransOil (KTO). The outlook is negative, S&P said April 24.
The affirmation reflects our view that KTO continues to enjoy a "high" likelihood of timely and sufficient extraordinary government support from the government of Kazakhstan as well as our assessment of KTO's stand-alone credit profile (SACP) at 'bb+' . We also continue to see KTO as a "strategically important" subsidiary of the KMG group, the statement said.
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, transporting more than 53% of oil volumes in the country. The agency considers 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 also assume that extraordinary state support would likely come directly from the government, rather than through 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,” the statement said.
KTO has a solid market position and limited competition from rail and tanker transport, owing to Kazakhstan's land-locked location, geographic isolation from the Caspian Sea, and the low cost of pipeline transportation.
However, the agency assesses country risk in Kazakhstan as "high," and considers tariff regulation to be opaque and irregularly revised.
The KTO group has a favorable debt structure, in our view, given that all of its outstanding debt is currently at the level of the operating subsidiaries and joint ventures. KTO also enjoys good financial flexibility, thanks to its adequate cash position, flexibility to defer most of its new projects, and available borrowing capacity.
In 2015, the agency expects KTO to continue generating strongly positive free operating cash flow (FOCF) on the back of the tariff increases that took place in 2014.
The agency thinks that KTO's sizable accumulated cash balances cover all existing investment projects and allows for high dividend payouts.
The company's main weaknesses include its potential involvement in new construction projects, which might result in weakened credit metrics and a more aggressive financial risk profile, and its exposure to potential dividend pressure from the parent.
The negative outlook reflects that on the parent, KMG. If the agency lowered the rating on the parent by one notch, that most likely would lead to a similar rating action on KTO.
“We also could lower the rating if KTO were to undertake new investment projects requiring significant external borrowing, resulting in weakened credit measures, or if we were to see substantial unfavorable changes in new contracts with customers,” the statement said.
“However, we note that if the local currency sovereign rating on Kazakhstan stays at 'BBB', the rating on KMG remains at '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 as low as 'b+' to trigger a downgrade.”
That might stem from a substantial increase in leverage on the back of heavy investments or dividends, taking the financial risk profile to the "aggressive" category (with debt to EBITDA exceeding 4x, for instance), or a significant deterioration in liquidity. The agency currently views these scenarios as very unlikely though.
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 government support because KTO's SACP is 'bb+', so any downgrade following such negative interference would be the result of weaker credit metrics.
The agency would be unlikely to revise the outlook on KTO back to stable unless we took a similar action on the parent company.
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