Fitch revises Kazakhtelecom outlook to negative
Jan 10. Reuters
Fitch Ratings has revised the Outlook on Kazakhtelecom JSC’s (Kaztel) Long-Term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘BB’. A full list of rating actions is at the end of this release.
Kaztel is a strong fixed-line incumbent with a near monopoly position in the traditional telephony and high broadband market share operating in a benign regulatory environment. The revision of the Outlook to Negative is driven by the company’s ambitions to re-enter the mobile segment. Mobile ambitions may dilute operating strengths and push the gross leverage above the downgrade threshold identified as 2.5x gross debt/EBITDA.
– Strong Incumbent Positions:
Kaztel is likely to maintain its dominant position in the fixed-line segment, helped by benign regulation and the scarcity of alternative networks. Kaztel estimated its fixed-line telephony market share at a high 92% at end-2011. Due to the lack of unbundling regulation, the company faces only limited facilities-based competition. Fixed-to-mobile substitution is the key threat, and this will drive modest fixed-line disconnections and pricing pressures, in Fitch’s view.
– Positive Broadband Outlook:
The Kazakh broadband market retains strong growth potential, driven by relatively low broadband penetration in the country (estimated by the company at only 15% of households at end-2011). Faced with only limited alternative infrastructure, Kaztel is best positioned to benefit from this growth. Its much relied-on ADSL technology allows it to quickly roll-out broadband service ahead of its peers. Broadband revenue growth is likely to be less pronounced compared with subscriber additions as the company’s currently inflated tariffs are likely to remain under regulatory and competitive pressure in key cities.
– Aggressive Mobile Ambitions:
Kaztel’s plans to re-enter the mobile market with a greenfield LTE network may have limited operating success, although the project will be the key leverage driver in 2013-2015. The Kazakh mobile market is well penetrated with 3G services and is highly competitive. Rivalry intensified with the arrival of Tele2, which has successfully pursued a discounter strategy.
– Weak Domestic Banking System:
The Kazakh domestic banking system is weak, implying a lack of local funding and resultant high FX risks, potentially limited access to deposits and scarce committed credit facilities. At end-2011, 92% of the company’s debt (excluding leases) was denominated in or pegged to foreign currencies. This ratio is unlikely to improve as new funding is likely to be FX denominated.
– Leverage Increase Likely:
High capex on the back of LTE roll-out and fixed-line network upgrades will push free cash flow deep into negative territory in 2013-2014. This may drive gross leverage to above the downgrade boundary of 2.5x gross debt/EBITDA.
– Weak Parent-Subsidiary Linkage:
Kaztel’s ratings reflect its standalone credit profile. Kaztel is of only limited strategic importance for Kazakhstan while operating and legal ties with its controlling shareholder, government-controlled Samruk-Kazyna, are weak. Although indirect government control is a positive credit factor, it does not justify any notching up of the rating, in Fitch’s view.
– Gross Metrics Important:
Kaztel’s debt profile is well spread with no medium-term peak maturities. At end-Q312, more than half of its debt had maturities of over three years. Kaztel has maintained a substantial cash cushion on its balance sheet (KZT101.2bn as of end-Q312). However, this is placed with low-rated domestic banks and may not be easily available, in Fitch’s view. The agency therefore primarily focuses its analysis on the company’s gross debt metrics.
– Off-Balance Sheet Liability a Concern
Kaztel issued a USD300m guarantee to China Development Bank covering a loan to Kazakkmys, its sister company, under an agreement with its controlling shareholder, Samruk-Kazyna. This guarantee will be triggered if Samruk-Kazyna defaults on its payments to China Development Bank. Samruk-Kazyna issued a cross-guarantee to Kaztel promising to pay it back any amounts that Kaztel would have to pay to China Development Bank. This cross-guarantee is from the same entity that benefits from Kaztel’s guarantee and, in Fitch’s view, is likely to be of limited value at a time when Kaztel’s guarantee is triggered.
This sizeable guarantee exposes Kaztel to the credit risks of its sister company. If triggered, the guarantee may result in liquidity pressure and a substantial debt and leverage increase, which would likely trigger a negative rating action. Fitch notes the poor disclosure of this liability, highlighting the inherent corporate governance and information transparency risks in Kaztel’s credit profile. The arrangements and the guarantee were disclosed in Kazakhmys’s reporting but not in Kaztel’s accounts.
RATING SENSITIVITY GUIDANCE:
Kaztel’s operating profile is strong for its rating level but could be dampened by its mobile strategic ambitions, which could precipitate a substantial rise in leverage. Positive rating momentum is unlikely before the company reduces its exposure to weak domestic banks.
A sustained rise in gross leverage to above 2.5x total debt/EBITDA, and/or a material increase in refinancing risks may lead to a negative rating action.
FULL LIST OF RATING ACTIONS
Long-Term IDR: affirmed at ‘BB’, Outlook revised to Negative from Stable
Short-Term IDR: affirmed at ‘B’
Local currency Long-Term IDR: affirmed at ‘BB, Outlook revised to Negative from Stable
National Long-Term Rating: affirmed at ‘A(kaz)’, Outlook revised to Negative from Stable
Senior Unsecured Debt in foreign currency: affirmed at ‘BB’
Senior Unsecured Debt in local currency: affirmed at ‘A(kaz)’