Fitch affirms Kazakhtelecom at ‘BB’; outlook stable

Dec 13. Reuters

Fitch affirms Kazakhtelecom at 'BB'; outlook stableFitch Ratings has affirmed Kazakhtelecom JSC’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB’, Short-term foreign currency IDR at ‘B’ and National Long-term rating at ‘A(kaz)’. The Outlooks on the Long-term ratings are Stable.

The affirmation reflects the expectation that the company’s gross leverage will most likely substantially increase in the medium-term as the result of the high level of planned capital expenditure and the intention to finance up to 50% of investment projects with new borrowings, while foreign currency and liquidity risks will remain substantial.

Fitch expects that total debt/EBITDA leverage will most likely increase from 1.37x at end-H111 to closer to 2.0x during the next few years driven by high capital expenditures on fibre-to-the-home (FTTH) and 4G roll-outs turning pre-dividend free cash flow generation negative. In 2011-14, Kazakhtelecom plans to create a FTTH network with a capacity of about 600,000 ports in all of Kazakhstan’s regional centres and urban settlements and provide 4G mobile broadband services in the majority of Kazakhstan’s cities by the end of 2018.

The affirmation also reflects the high foreign currency risks with the majority of debt denominated/linked to foreign currency and liquidity risks with cash stored in local banks which have a substantially lower rating than Kazakhtelecom.

The Stable Outlook is supported by the fact that, at the moment, Kazakhtelecom has a fairly strong credit profile for its rating category with proved market positions, solid EBITDA margin generation of above 35% in 2009-10 and headroom for a leverage increase. However, leverage growth above total debt/EBITDA above 2.5x and/or a material increase of refinance risks might be rating negative.

Fitch rates Kazakhtelecom on a standalone basis and does not factor in any support due to indirect government ownership.

Also, the agency thinks that a potential sale of the company’s 49% stake in Kcell which has historically delivered a solid dividend to Kazakhtelecom, would be mildly negative if Samruk-Kazyna, as the company’s controlling shareholder required Kazakhtelecom to upstream all cash received from the sale.

In Fitch’s view, it is not yet proven that after building a 4G network Kazakhtelecom will substantially improve its niche market position in the mobile segment given the expected low demand for mobile broadband services in the mid-term in Kazakhstan and the presence of Kcell, Beeline and Tele2’s actively expanding 3G networks which will most likely be able to fulfil this demand.