Fitch rts Kazakhstan Temir Zholy’s proposed nts at ‘BBB-(exp)’

June 25. Reuters

Fitch rts Kazakhstan Temir Zholy's proposed nts at 'BBB-(exp)'Fitch Ratings has assigned Kazakhstan Temir Zholy Finance B.V.’s proposed notes an expected senior unsecured rating of ‘BBB-(exp)’. The notes are guaranteed by Kazakhstan Temir Zholy (KTZ), the national railway company and its subsidiaries JSC Kaztemirtrans and JSC Locomotive. The final rating is contingent upon the receipt of final documentation conforming materially to information already received.

Fitch rates KTZ Long-term Issuer Default Rating (IDR) and senior unsecured at ‘BBB-‘. The Outlook on the IDR is Positive.

KTZ’s ratings reflect its 100% indirect state ownership and strategic importance to Kazakhstan (‘BBB’/Positive/’F3’), as it provides about half of freight and passenger transportation in the country. Furthermore, KTZ’s tariffs are regulated and its investment plans approved, and directly co-funded, by the state (through equity injections and loans). The government also provides direct subsidies for the loss-making passenger business.

Although KTZ benefits from strong links with the state, full and timely financial support, which would allow rating alignment with the sovereign is not certain without robust legal ties (for example, explicit guarantees). KTZ’s rating is therefore one notch down from the sovereign. Fitch revised KTZ’s Outlook to Positive from Stable after the upgrade of Kazakhstan’s IDR to ‘BBB’/Positive from ‘BBB-‘/Positive in November 2011. Fitch considers KTZ’s standalone credit profile commensurate with the low ‘BBB’ rating category.

JSC National Welfare Fund Samruk-Kazyna (S-K) plans to offer 5%-15% stakes in a number of Kazakh entities, including KTZ’s subsidiaries, to the local public in a so-called ‘People’s IPO’ over 2012-2015. Fitch believes that following the proposed IPO, the government will continue to support KTZ at least within the rating horizon.

Fitch expects profitability and cash flow from operations (CFO) to remain strong in 2012, but the increase in capex will mean higher gross debt. Fitch expects free cash flow (FCF, before equity contributions) to remain negative for the foreseeable future. KTZ’s funds from operations (FFO) adjusted leverage of 1.6x at end-December 2011 was slightly below that of 2010 (1.8x) and returned to its 2009 level. Due to its substantial capex for 2012-15, Fitch expects KTZ’s gross leverage to increase markedly to around 3x in 2014-15.

An upgrade of Kazakhstan’s IDR would probably be replicated for KTZ (with the current one notch differential), unless its links with the state weaken. Similarly, a change in Outlook for the sovereign IDR to Stable would be replicated, unless KTZ’s standalone profile significantly strengthens.

KTZ’s YE11 cash and deposits stood at KZT181bn which is sufficient to cover short-term maturities of KZT33bn. However, expected negative FCF continues to add to funding requirements.

Cash (largely in US dollars) is mostly held with domestic banks, including ATF Bank JSC (‘BBB’/Negative), Kazkommertsbank (‘B’/Stable) and Halyk Bank of Kazakhstan (‘BB-‘/Stable), whose ratings include the potential for moderate government assistance, and whose credit profiles remain challenged.

FX risk remains a concern for KTZ as at end-2011 about one-third of its debt was denominated in dollars. Hedging is currently limited to monitoring exchange rates changes and maintaining a portion of cash in dollars. Interest on KTZ’s debt is mostly fixed (74% of debt) at an average rate of about 6%, reducing its exposure to interest rate fluctuations.