Sovereign Wealth Fund Samruk-Kazyna (Kazakhstan) proposed bonds issue assigned preliminary rating BBB+ by Standard & Poor’s
March 28. KASE
Standard & Poor’s Ratings Services said today that it had assigned its ‘BBB+’ preliminary long-term senior unsecured local currency debt rating to the KZT75 billion seven-year notes to be issued by Kazakhstan’s state-owned holding company Samruk-Kazyna (foreign currency BBB/Stable/A-3; local currency BBB+/stable/A-2).
The rating on the notes is equalized with the long-term local currency sovereign rating on Samruk-Kazyna. The amount and interest rate, as well as other details of the notes, will be determined during the placement.
We equalize the ratings on Samruk-Kazyna with those on the Republic of Kazakhstan (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Kazakhstan national scale kzAAA), reflecting our view of an “almost certain” probability of timely and sufficient extraordinary support from the government of Kazakhstan in case of financial distress at Samruk-Kazyna. According to our criteria for government-related entities, our assessment of the likelihood of support is based on Samruk-Kazyna’s “critical” role as the main operator for the government’s financial and economic activities and the fund’s “integral” link with the government.
Samruk-Kazyna is a 100% state-owned holding company that consolidates almost all of Kazakhstan’s state-owned enterprises. As of Nov. 30, 2010, Samruk-Kazyna united 404 subsidiaries and dependent organizations. Samruk-Kazyna’s oversight role empowers it to monitor and approve every borrowing for every company in the fund on behalf of the government. The holding company’s investment and financing decisions reflect government policy and the government’s direct input via Samruk-Kazyna’s board of directors, which the prime minister chairs. Other members of the board include the ministers of finance, economy and trade, oil and gas, and industry and new technology, as well as three independent directors.
Standard & Poor’s estimates that Samruk-Kazyna would be rated in the ‘b’ category on a stand-alone basis, under our corporate ratings criteria. This is primarily because nearly all of Samruk-Kazyna’s cash and deposits are placed with local banks, which themselves receive assistance from the fund. Withdrawing this liquidity from these financial institutions would only be possible over the medium to long term as financial conditions improve.
At the holding company level, Samruk-Kazyna’s cash revenues consist of interest payments and dividends from its investments. Additional cash flow comes from transfers from the central government budget and from the National Oil Fund. We perceive Samruk-Kazyna’s refinancing risk to be low, given the limited amount owed to either related parties or the government. We think Samruk-Kazyna’s free cash flow will be sufficient to service its debt.
In our opinion, the government of Kazakhstan has expressed strong interest in supporting Samruk-Kazyna by providing it with financial and nonfinancial assistance. The budget law of Kazakhstan includes provisions to make annual capital injections to the fund. In 2010-2013, these are slated to total KZT317 billion (about $2.5 billion or 2% of GDP), as well as KZT49 billion in direct lending to the fund. Many of the entities within the holding company benefit from direct and regular state budgetary transfers. Strong ongoing government support and what we see as extremely tight supervision support Samruk-Kazyna’s “integral” link with the government.