KazMunaiGaz Loses S&P Investment-Grade Credit Rating

July 7. Bloomberg

By Nariman Gizitdinov

KazMunaiGaz Loses S&P Investment-Grade Credit RatingKazMunaiGaz National Co., Kazakhstan’s state oil producer, lost its Standard & Poor’s investment-grade credit rating on concern the company will struggle to manage its cash in domestic banks.

S&P cut KazMunaiGaz’s long-term corporate credit rating to BB+ from BBB-, it said today in a statement, citing a “weakened stand-alone credit profile, which incorporates our concerns about the quality of the company’s liquidity.”

KazMunaiGaz and its subsidiaries are required by the government to hold most of their financial assets with domestic banks, according to an annual report of KazMunaiGas Exploration Production. The company and its units hold cash at Halyk Savings Bank of Kazakhstan, Kazkommertsbank and BTA Bank, whose liquidity and asset quality are “under pressure,” S&P said.

“The flexibility KMG and its subsidiaries have in managing these deposits is limited,” the ratings service said, citing the company’s recourse to new financing to buy MangistauMunaiGas, even after reporting “significant” cash reserves.

Kazakhstan, which holds 3.2 percent of the world’s crude according to BP Plc, has spent 770 billion tenge ($5.1 billion) of oil revenue to prop up its economy and banking system after the global credit crisis cut funding. So-called non-performing loans among the country’s 38 lenders have more than tripled this year to 29 percent of their 10.2 trillion-tenge value as of June 1, the state financial regulator said.

Negative Cash Flow

“KMG’s liquidity is considered weak due to the need to repay or refinance short-term maturities of about $700 million by the end of 2009 and about $900 million in 2010 at the level of subsidiaries JSC Trade House KMG and Rompetrol Group NV,” S&P said. These units will “generate neutral or negative free operating cash flow and, consequently, fully depend on support from their parent.”

The company’s liquidity is under further pressure from the need to finance “strategic” investments, including cash calls of about $1.7 billion this year and next, S&P said.

KazMunaiGaz’s weakening liquidity is in part offset by expected dividend streams of as much as $800 million a year from its subsidiaries, $1.3 billion in subordinated bonds, and potential government support, the ratings service said.

S&P kept a “stable” outlook for the Kazakh company.