Baku, Azerbaijan, Dec. 15
By Elena Kosolapova – Trend:
Standard & Poor's Ratings Services has affirmed its 'BB' long-term and 'B' short-term corporate credit ratings on Kazakhstan-based electricity group Samruk-Energy JSC, the message of S&P said Dec.15.
The outlook is stable, according to the message.
At the same time, S&P affirmed its 'kzA+' Kazakhstan national scale rating on the company.
“We also affirmed our 'BB' issue rating on the group's $500 million senior unsecured notes due 2017 and withdrew the '4' recovery rating on the issue, due to a change in our rating approach,” said the rating agency. “The affirmation reflects our unchanged view that there is a high likelihood that Samruk-Energy would receive timely and sufficient extraordinary support from the Kazakh government, if needed.”
Important role for the government, given its strategic position as a leading provider of electricity in Kazakhstan; and a very strong link with the government, which fully owns Samruk-Energy through Samruk-Kazyna, reflects the agency’s assessment of Samruk-Energy.
S&P expects that the government will maintain majority ownership of Samruk-Energy for at least the next two years. The rating agency also considers the government's involvement in strategic decision-making at the company, the risk to the country's reputation if Samruk-Energy were to default, and the government's track record of providing strong financial support to Samruk-Energy in the form of equity injections, asset transfers, low-interest-rate loans, debt guarantees, and tax benefits.
“We continue to assess the group's stand-alone credit profile (SACP) at 'b+', based on our view of its weak business risk profile and aggressive financial risk profile,” S&P said. “We expect that the pressure on the group's credit metrics and liquidity stemming from tenge devaluation, exposure on foreign currency-denominated debt, its ambitious investment program, and $500 million Eurobond repayment in December 2017 will be mitigated by supportive government actions, as well as by Samruk-Energy's proactive approach to refinancing and flexibility in the investment program.”
The message said that the Kazakh government--via state-owned investment vehicle Samruk-Kazyna--has provided tangible support to Samruk-Energy, including by financing the acquisition of a 50 percent stake in Ekibastuz GRES-1 (worth $1.3 billion) through 200 billion tenge (about $1.3 billion) loan and a 21 billion tenge equity injection at the beginning of 2014.
In October last year, Samruk-Energy received another equity injection of 100 billion tenge, which it used to repay half of the loan to Samruk-Kazyna, according to the message.
At the moment, the agency expects that the interest rate on the remaining 100 billion tenge of this loan will decrease significantly before the end of 2015. S&P also assumes in its base case that the group will receive another equity injection in the first quarter of 2016 to repay this loan in full.
In the agency’s view, these supportive measures would help alleviate some of the pressure on Samruk-Energy's financial metrics from the tenge's devaluation in 2015. The group's US dollar-denominated debt totals about $750 million.
“Our SACP assessment includes a negative one-notch adjustment, due to the negative capital structure modifier, reflecting exposure from the foreign currency debt,” the message said.
However, the agency includes a positive adjustment from its comparable rating analysis to reflect the large share of long-term government loans in Samruk-Energy's debt portfolio, guarantees from Samruk-Kazyna and the Kazakh Ministry of Finance on several bank loans, and the government's track record of providing tangible ongoing financial support to Samruk-Energy.
The stable outlook reflects the agency’s view that the risks associated with Samruk-Energy's ambitious investment program, pressure on the group's credit metrics, the large Eurobond debt repayment in 2017, and high debt leverage are balanced by the agency’s view of a high likelihood of timely and sufficient extraordinary government support if needed, as well as flexibility in Samruk-Energy's investment program, sizable cash balances, and likely early refinancing.
This is underpinned by Samruk-Energy's strategic importance for and strong track record of receiving financial aid from Kazakhstan's government, as well as Samruk-Energy's solid market position and benefits of vertical integration, according to the message.
According to S&P methodology for rating government-related entities, if the sovereign rating were lowered to 'BBB-', this would not automatically result in a similar rating action on Samruk-Energy, provided that Samruk-Energy's SACP and the likelihood of extraordinary state support remained unchanged.
“Downward pressure on the ratings might arise if the group adopts more-aggressive financial policies that aren't commensurate with our current expectations, for example, if increased investments or disposal of EBITDA-generating assets weakened Samruk-Energy's financial position, with deterioration of credit measures and liquidity, or poor covenant compliance,” the rating agency said.
“We could also consider a downgrade if Samruk-Energy makes no progress on refinancing the Eurobond and the government does not provide financial support, leading us to reassess the SACP and our view of the likelihood of extraordinary state support.”
“We would likely lower the rating by one notch if Samruk-Energy's SACP were to weaken to 'b-' or we considered that the likelihood of extraordinary state support had reduced to moderately high, even if the SACP and sovereign ratings remained unchanged,” S&P said.
“We think that, currently, ratings upside is limited by the group's high leverage and ambitious investment program, and uncertainties related to the asset disposal plan and Eurobond refinancing plan.”
“We might consider an upgrade if Samruk-Energy's SACP strengthened to at least 'bb-', which might stem from a sustainable improvement in the group's credit metrics to the significant financial risk category, including debt to EBITDA of 3x-4x and FFO to debt in the 20-30 percent range,” said the message. “Upside potential could also stem from larger equity contributions than we currently expect, aimed at reducing debt; or lower investments; alongside stronger liquidity and debt maturity profiles.”
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