Fitch assigns Kazakhstan Engineering ‘BBB-‘ FC IDR; outlook stable
Aug 7. Reuters
Fitch Ratings has assigned JSC National Company Kazakhstan Engineering (KE) Long-term foreign currency and local currency Issuer Default Ratings (IDRs) of ‘BBB-‘ and ‘BBB’, respectively. Fitch has also assigned foreign and local currency senior unsecured ratings of ‘BBB-‘ and ‘BBB’ respectively and a Short-term foreign currency IDR at ‘F3’. The Outlooks on the Long-term IDRs are Stable. A full list of ratings is at the end of this release.
KE’s ratings are based on Fitch’s Parent Subsidiary Linkage methodology and are notched down two notches from the rating of KE’s ultimate 100% shareholder, the Republic of Kazakhstan (foreign currency IDR BBB+/Stable, local currency IDR A-/Stable).
KEY RATING DRIVERS:
Fitch deems the linkage moderate to strong due to the state control, strategic importance of the company to the government’s ambition to expand the country’s industrial base and diversify the national economy as well as the tangible financial support from the state already exhibited and pledged. The two notch differential reflects the lack of debt guarantees provided by the state and the slightly lower priority KE would likely receive compared to key natural resources, utilities or infrastructure companies, whose ratings are notched down by one notch from the sovereign.
Standalone ‘B’ Category Rating
Fitch believes that on a standalone basis, KE’s rating would likely be at the high end of the ‘B’ category, reflecting its weak business profile, negative free cash flow (FCF), moderately high leverage and adequate liquidity.
Limited Business Profile
KE’s business profile is characterised by its very small size, limited product range, lack of long-term high-tech development achievement and little customer diversification, all of which place a cap on the company’s standalone rating in the ‘B’ category. Nevertheless, we acknowledge the growth that the group is likely to experience in the coming years stemming from the Kazakhstan government’s ambitious plans for the entity as the focal point of the nation’s modernisation, industrialisation and export drive. Coupled with the technological know-how the company is acquiring from various joint venture partners, the business profile is likely to see a visible improvement within the rating horizon.
Moderate Capital Structure
Gross and net FFO adjusted leverage were 3x and 0.7x, respectively, at end-2012. This includes over KTZ5bn of shareholder loans, representing around 40% of total debt, which mature at end-2013, but which Fitch expects to be rolled over. Debt levels are expected to rise in 2013 as a result of the capacity expansion the group is undertaking. However, it is likely that it will plateau in 2014 as the projected equity injections and the company’s own cash reserves should be adequate to finance capex needs. Thereafter, Fitch expects that leverage will improve to below 2x as capex needs subside and cash generation is applied towards debt reduction.
Improved Margins Expected
To date, the company’s margins have been moderate to weak, but we expect them to improve in the near term on the back of greater cost discipline, efficiency improvements and state assistance. The group’s FCF is likely to be negative in the coming two/three years as a result of high capex projections and working capital outflows. The former relates to the capacity expansion the group is undertaking, while the latter is linked to the overall projected growth in the business.
The company had around KZT10bn of cash at end-2012, which was more than sufficient to cover short-term maturities (most of which were the shareholder loans). Nevertheless, the large investment needs of the group mean that FCF is likely to be negative in the coming two/three years and external funding will be necessary to finance the projected capex. To this end, KE is reliant upon the equity injections which have been pledged by the government as well as the new debt which will be issued this year. Without these, Fitch notes that growth plans would need to be materially scaled back.
The Stable Outlook on the Long-Term IDR reflects that on the Long-Term foreign currency IDR of the Republic of Kazakhstan.
Future developments that could lead to positive or negative rating actions include:
– As KE’s IDRs and Outlook are driven by those of the Republic of Kazakhstan, any change to the sovereign could prompt a review of the company’s IDRs, National Ratings and Outlook.
– Any strengthening of this support, such as a provision of written guarantees of KE’s debt from the Kazakhstan Ministry of Finance, would be likely to lead to closer rating linkage. A weakening of support, such as a reduction in the state’s shareholding in KE, a waning commitment to and support for the company’s programmes, or a change in the treatment by the state that KE receives relative to other state-owned companies, could lead to a widening of the rating gap between Kazakhstan and KE.
The assigned ratings are as follows:
Long-Term local currency IDR ‘BBB’; Outlook Stable
Long-Term foreign currency IDR ‘BBB-‘; Outlook Stable
Local currency senior unsecured rating ‘BBB’
Short-Term IDR ‘F3’
National Long-Term rating ‘AA+(kaz) ‘; Outlook Stable
National senior unsecured rating ‘AA+(kaz) ‘
National Short-Term rating ‘F1+(kaz) ‘