Moody’s downgraded Corporate Rating of National Company KazMunayGaz (Kazakhstan) to Baa3, outlook Stable

October 29. KASE

Moody's downgraded Corporate Rating of National Company KazMunayGaz (Kazakhstan) to Baa3, outlook StableMoody’s Investors Service has today undertaken a series of rating actions related to JSC National Company KazMunayGas (“KMG NC” or “the group”) and its subsidiaries in conjunction with the downgrade of the group’s corporate family rating (CFR) by one notch to Baa3; and the change of outlook to stable from negative. These rating actions are as follows:

(i) The rating of KMG NC’s senior unsecured notes has been lowered to Baa3 from Baa2;

(ii) The ratings of four subsidiaries of KMG NC have been changed as follows:

– JSC KazMunaiGas Exploration Production (KMG EP) Issuer rating downgraded to Baa3 from Baa2. Outlook changed to stable from negative.

– JSC KazTransOil (KTO) Issuer ratings downgraded to Baa3 from Baa2. Outlook changed to stable from negative.

– JSC KazTransGas (KTG) Issuer rating downgraded to Baa3 from Baa2. Outlook changed to stable from negative.

– JSC Intergas Central Asia (ICA), a subsidiary of KazTransGas Issuer ratings downgraded to Baa3 from Baa2. Outlook changed to stable from negative.

Moody’s considers KMG NC to be a Government-Related Issuer (GRI). The rating agency has downgraded the group’s Baseline Credit Assessment (BCA) to 13 from 12 (corresponding to Ba3 and Ba2 ratings on the global rating scale, respectively). The support and dependence levels remain unchanged.

RATINGS RATIONALE

The downgrade of KMG NC’s CFR reflects Moody’s assessment of the group’s weakening financial profile, a result of the potential slow-down in cash flow generation that has led to weaker-than-expected leverage metrics in 2010-2012. The assessment reflects: (i) uncertainties about the level of dividends available from the group’s affiliates, given the potential increase in capex spending at the affiliates’ level; (ii) the substantial capex commitments of the group, with the bulk of investment directed at green-field projects that will not generate immediate cash inflows; and (iii) the expected increase in the group’s consolidated net debt position in the next three years.

Moody’s now considers it unlikely that KMG NC will be able to demonstrate the recovery in financial metrics commensurate with a Baa2 rating. Specifically, these requirements include an adjusted retained cash flow (RCF)/net debt ratio above 40% and a total consolidated debt/consolidated EBITDA ratio below 2.5x during 2010-2012.

Therefore, the Baa3 rating and stable outlook reflect Moody’s expectation that over the course of 2010-2012, KMG NC will maintain (i) an adjusted RCF/net debt ratio of 30%-35%; and (ii) a total consolidated debt/consolidated EBITDA ratio of 2.5x-2.8x.

Notwithstanding the re-calibration of KMG NC’s short-term financial outlook, the issuer rating of the group continues to reflect: (i) its strategic importance to the Kazakh economy; (ii) the large scale of the group’s asset base; (iii) the positive track record and good growth prospects of the group’s exploration and production (E&P) business, specifically for KMG EP, and the Tengiz and Kashagan oil projects; and (iv) the significant value of the oil and gas transportation segments. In Moody’s view, these segments provide KMG NC with favorable diversification into utility-type earnings, supported by relatively stable and transparent regulations.

At the same time, the rating is constrained by KMG NC’s: (i) leveraged financial profile; (ii) track record of aggressive acquisition policy historically, and significant investment programme (which needs to be supported by additional borrowing), although flexibility exists to reduce investments due to a discretionary element; (iii) weak refining margins; (iii) complex corporate structure that impacts the visibility of cash flows; and (iv) exposure to country-related risk factors.

The rating downgrades of the four subsidiaries of KMG NC are principally driven by the lowering of the group’s issuer rating. However, the downgrades also reflect Moody’s concern that the financial metrics and liquidity positions of the individual subsidiaries might deteriorate as a result of them providing support to the parent company. This support could come in the form of increasing upstream dividends to help fund the group’s other businesses and activities and help mitigate lower dividend inflows from the affiliates.                           

The stable outlook on KMG NC’s ratings reflects its strategic importance to the Kazakh economy, as well as Moody’s expectation that the group will be able to maintain an annual adjusted RCF/net debt ratio above 30% in the next two to three years. The outlook is also supported by a stable liquidity position of the group, which recently benefitted from the reduction of its exposure to the BTA bank as a result of the transaction with the group’s shareholder Samruk-Kazyna. Lastly, the group’s access to the capital markets demonstrated historically provides additional comfort.

Based on the updated financial guidance, Moody’s does not foresee upward pressure being exerted on the ratings of KMG NC in the next 12-18 months. However, positive pressure would be exerted on the ratings if the group’s financial performance recovers, reflected in stronger financial metrics, with (i)leverage below 2.5x on a total consolidated debt/consolidated EBITDA basis; and (ii) an annual adjusted RCF/net debt ratio above 40% on a sustainable basis.

An upgrade would also require a strong improvement in the performance of KMG NC’s downstream segment and a good liquidity position – supported by access to committed lines, strong operating cash flow generation to meet major capex projects and proactive management of the group’s funding requirements. While Moody’s notes the considerable progress achieved by the group to date with regard to improving transparency and availability of information, clear guidance regarding longer-term growth targets will be required to support an upgrade.

The ratings of KMG NC could be downgraded if the group’s financial position deteriorated further, such that it were unable to maintain: (i) an adjusted RCF/net debt ratio above 30% in 2010-2012; (ii) a debt/total capitalisation ratio below 50%; and (iii) a total consolidated debt/total EBITDA ratio below 3.0x, which would also imply a material reduction in the covenant headroom. Any unforeseen change in the currently favorable political and regulatory landscape and the level of state support could also warrant a reassessment of the GRI rating factors, which in turn may exert negative pressure on KMG NC’s ratings. The group’s ratings are currently equally influenced by its stand-alone credit and the credit quality of the sovereign. Thus, a downgrade of the sovereign rating of Kazakhstan could trigger a downgrade of KMG NC’s ratings.

Moody’s last rating action on KMG NC was implemented on 16 April 2010, when the rating agency affirmed the group’s Baa2 CFR (and the ratings on its subsidiaries) and assigned a negative outlook on all ratings. On 11 June 2010, Moody’s assigned provisional (P)Baa2 ratings to domestic notes issued by KMG NC .

The principal methodologies used in rating KazMunayGas NC JSC and its subsidiaries were Global Integrated Oil & Gas Industry published in November 2009, and Government-Related Issuers: Methodology Update published in July 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody’s website.

Headquartered in Astana, Kazakhstan, KMG NC is a wholly state-owned (through the SamrukKazyna holding company), vertically integrated oil and gas operator with core operations in E&P, refining, domestic oil and gas transportation, and the marketing and trading of oil and petroleum products. In 2009, the group generated around USD10.8 billion in revenues and EBIT of USD3.3billion.

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