Fitch affirmed Central Asia Cement (Kazakhstan) and its bonds ratings, Outlook “Positive”

December 14. KASE

Fitch affirmed Central Asia Cement (Kazakhstan) and its bonds ratings, Outlook "Positive"Fitch Ratings has affirmed Joint-Stock Company Central Asia Cement’s (CAC) National Long-Term Rating at ‘BB-(kaz)’ and revised the Outlook to Positive from Stable. The agency has also affirmed CAC’s senior unsecured KZT1.5bn bond rating at ‘B(kaz)’.

The completion of Steppe Cement’s capital increase reinforces CAC’s financial structure and should allow financing of the investment in the Line 5 refurbishment, while reducing leverage. The group is still exposed to high operational risk due to its concentration on the volatile Kazakh cement market.

KEY DRIVERS

Investment Plan Financed

CAC’s parent company has successfully completed a GBP10m (USD16m) capital increase. The proceeds will be transferred to the operating companies via an intra-group loan and used to finance the completion of the Line 5 refurbishment. The capital increase proceeds and CAC’s KZT1.5bn (USD9.5m) unsecured bond issue completed in November mean that the group raised most of the USD30m needed to complete its investment in Line 5. The residual USD5m will be financed from the internal cash generation.

Stronger Financial Structure

The capital increase significantly improves the group’s financial structure. Fitch expects FFO net leverage to decline to below 2.0x at end-2012 (from 2.6x at end-2011). The revision of the Outlook to Positive reflects the agency’s expectation that gross leverage will materially improve from 2013, when Steppe Cement will repay part of its long-term bank facilities. The agency’s forecasts FFO gross leverage will fall below 2.0x in 2013 and 2014.

High Operational Risk

CAC’s ratings reflect the high operational risk, as the group is present exclusively in the Kazakh cement market that has been extremely volatile in terms of both volumes and prices in recent years. The potential realisation of additional capacity from a number of competitors could cause a demand/supply imbalance in the next few years, which could put pressure on cement prices and on industry margins. Moreover, Steppe Cement operates a single cement production plant, thus increasing the operational risk. Lastly, the completion of the Line 5 projects is still subject to execution risk.

Solid Market Positioning

The ratings reflect Steppe Cement’s leading position in the Kazakh cement market, with a share of 20%, and its cost advantage over its competitors, thanks to the favourable location of its Karaganda plant, which has been partially renovated to use the efficient dry technology. The rating and Positive Outlook also reflect the current positive market trend, with double-digit growth in both cement volume and prices in 2012, and the healthy long-term prospects for cement demand in Kazakhstan, backed by solid GDP growth, strong potential for residential demand, and by the upgrading of infrastructure.

High Secured Debt

The rating of CAC’s unsecured bond reflects its subordination to all the other bank facilities of Steppe Cement and the fact that all the major group’s assets are pledged. Long-term facilities from HSBC and EBRD are secured against the Karaganda cement plant (the only group’s plant) while RCF from local banks are secured against commercial receivables and inventories, thus reducing the recovery expectation for unsecured creditors in case of default.

Steppe Cement Consolidated

Fitch rates CAC on the basis of the credit profile and the consolidated figures of Steppe Cement Limited. Fitch considered this to be the most meaningful economic entity in view of both the strong operational ties between Steppe Cement, and its 100% controlled subsidiaries CAC and Karcement, and the cross guarantees on their respective debts.

RATING SENSITIVITY GUIDANCE:

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

– EBIT margin to remain above 10% on a sustained basis

– FFO gross leverage to improve to below 2.0x on a sustained basis

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

– FFO gross leverage to increase to above 3.5x on a sustained basis

– Delays in the Line 5 project completion, implying a material diversion from Fitch expectation in terms of revenue and margins

– Cost overruns on the new project, implying a material increase in leverage

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