S&P affirms National Welfare Fund Samruk-Kazyna (Kazakhstan) Ratings, Outlook – “Stable”
November 30. KASE
Standard & Poor’s Ratings Services today affirmed its long- and short-term local and foreign currency credit ratings on Kazakhstan-based government-related entity Samruk-Kazyna at ‘BBB+/A-2′. The outlook is stable.
Under our criteria for rating government-related entities, the ratings on Samruk-Kazyna are equalized with those on Kazakhstan (foreign currency BBB+/Stable/A-2; local currency BBB+/Stable/A-2; Kazakhstan national scale kzAAA’). This reflects our view of an “almost certain” likelihood of the government providing timely extraordinary support sufficient to service all debt, if needed. Our assessment is based on our view of Samruk-Kazyna’s “critical” role as the main operator for the government’s off-budget financial and economic activities and the company’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 and manages them for the government. Its role underpins our view of the entity’s strategic importance.
Samruk-Kazyna is highly integrated with the government. It plays a pivotal role as a vehicle for implementing the government’s Development Plan 2020, which is aimed at industrialization and economic diversification, and takes a controlling role in public-sector companies. As an overseer, it is empowered to monitor all borrowing for every company in the fund on behalf of the government. It also controls financial flows between the companies and the government. Samruk-Kazyna’s investments and financing decisions reflect government policy and the government’s direct input via Samruk-Kazyna’s board of directors.
We assess Samruk-Kazyna’s stand-alone credit profile (SACP) at ‘b+’. Key weaknesses for the SACP are the relatively low stand-alone credit quality of its assets, the concentrated nature of the portfolio, and the overall high and increasing level of consolidated group debt. At June 30, 2012, the group had $41.3 billion debt, compared to $6.1 billion EBITDA in the first half of 2012 and $0.9 billion negative free operating cash flow (FOCF), under our methodology.
We assess the SACP of Samruk-Kazyna’s largest asset, state-owned oil and gas company, KazMunayGas (KMG), at ‘b+’, due to its high leverage. Samruk-Kazyna also continues to be heavily exposed to the still-weak Kazakh financial sector, which was responsible for about 24% of the parent-level portfolio as of June 30, 2011 (including bank stakes, loans, and deposits). The company has high investment needs at the parent and subsidiary level. Meanwhile, parent-level income is very volatile for the size of its portfolio and debt levels. We expect that most of Samruk-Kazyna’s ongoing investments, including the support package for BTA Bank, will be funded by the government.
Unlike other holding companies, Samruk-Kazyna has limited flexibility to sell assets to cover its debt service needs, because most of its assets are strategic and unlisted. Its investments are largely covered by ongoing financing from the government. Kazakhstan’s budget law includes provisions to make annual capital injections to the fund. Samruk-Kazyna’s SACP reflects our expectation that the company will continue to receive regular government support in the form of long-term loans and capital injections, including funds for the second restructuring of local lender, BTA Bank. It also reflects the fact that most parent- level debt is due to the government or subsidiaries, and our view that debt to other parties (including China Development Bank loan, bonds, and guarantees on certain subsidiaries’ debt) is likely to stay manageable relative to the size of portfolio.
The Kazakh government’s plan to hold a “people’s IPO” campaign is part of a program to develop the domestic capital markets and diversify economic activity. This is unlikely to affect the ownership structure of Samruk-Kazyna or change its “critical” policy role or “integral” link with the government, in our view.
We assess Samruk-Kazyna’s parent-level liquidity as “adequate”, due to its large cash reserves, long-term debt profile, and ongoing support from the state. At June 30, 2012, the holding company had cash and short-term bank deposits of 3.7x debt due within one year. At the consolidated level, cash reserves covered only 96% of short-term debt, but short-term debt included $5.2 billion of BTA Bank debt. If we exclude this, the coverage is 1.64x. Still, the group’s consolidated liquidity and the holding company’s liquidity are significantly exposed to the Kazakh banking sector, which remains weak, and large investment ambitions at the subsidiary level, which results in negative FOCF.
The stable outlook reflects our outlook on the long-term rating on Kazakhstan and our view that Samruk-Kazyna’s “critical” role in the economy and “integral” link with the government is unlikely to change. We expect that most of Samruk-Kazyna’s investments will be funded by the government, including Samruk-Kazyna’s cash support to BTA Bank. The conversion of Samruk-Kazyna’s deposit with BTA Bank into equity is neutral for our assessment of credit quality because we had always considered these deposits as support for the bank. We expect that any support for KMG, with a view to the potential expansion of state ownership in oil and gas fields, would also be funded by the government.
We would raise or lower the ratings on Samruk-Kazyna if the ratings on the Republic of Kazakhstan were raised or lowered. Any signs of weakening sovereign support, either because Samruk-Kazyna’s policy role changes or its link with the government weakens, may change our assessment of Samruk-Kazyna’s role for and link with the government. This would result in downward pressure on the rating.
Downside pressure on the SACP could arise from debt to third parties materially increasing, relative to the size of the portfolio, or if Samruk-Kazyna’s ongoing investments were not supported by government funding. We could revise the SACP upward if we saw improved performance at Samruk-Kazyna’s key subsidiaries, a track record of moderate investing policy at the subsidiary level, and/or government support to the key subsidiaries’ investment plans and refinancing.