Moody’s affirmed National Company Kazakhstan Temir Zholy and its bonds ratings

May 15. KASE

Moody's affirmed National Company Kazakhstan Temir Zholy and its bonds ratingsMoody’s Investors Service has today affirmed Baa3 issuer rating and senior unsecured rating of JSC National Company Kazakhstan Temir Zholy (KTZ) and Baa3 rating of the senior unsecured notes issued by Kazakhstan Temir Zholy Finance B.V. (KTZ Finance), a special purpose financial company, and guaranteed by KTZ and its operating subsidiaries. Moody’s has also affirmed the Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating (PDR) of Kaztemirtrans JSC (KTT), as KTT is a key wholly owned operating subsidiary of KTZ, is managed as an integral part of KTZ and faces similar risks. Concurrently, Moody’s has assigned a provisional (P)Baa3 rating with a positive outlook to the proposed CHF-denominated notes to be issued by KTZ. The outlook on all the ratings remains positive.

“Our affirmation of KTZ’s ratings reflects our view that the company’s financial metrics will remain within guidance for the current baseline credit assessment (BCA) of ba2, which is a measure of the company’s standalone financial strength, despite anticipated moderately increased leverage in the next few years” says Sergei Grishunin, a Moody’s Assistant Vice President – Analyst and backup analyst for KTZ. “The company’s financial metrics are further buoyed by its long-term debt maturity profile, low refinancing risks and solid liquidity.”

RATINGS RATIONALE

– AFFIRMATION OF Baa3/Ba1 RATINGS –

KTZ’s Baa3 senior unsecured issuer rating is based on Moody’s designation of the company as a government-related issuer (GRI), which reflected in KTZ’s BCA of ba2, its ‘high’ dependence and ‘high’ implied state support.

Today’s affirmations reflects Moody’s expectations that KTZ will be able to maintain its financial metrics, such as leverage (measured by Moody’s adjusted debt/EBITDA) and interest coverage (measured by Moody’s adjusted EBITA/interest expenses), within the guidance for the current BCA of ba2. This comes against the backdrop of Moody’s projections that KTZ’s financial metrics will soften in the next 12-24 months as a result of the company’s large debt-financed capital expenditure and exposure to foreign-currency risk. Nearly 67% of the group’s debt is denominated in US$ (as of year-end 2013) while its revenues are predominantly denominated in Kazakhstan tenge (KZT).

KTZ’s ba2 BCA is constrained by the company’s (1) limited freight diversity; (2) aged fleet and rail infrastructure, which requires substantial investments in renewal and modernization and limits capex flexibility; and (3) overall exposure to an emerging market operating environment with a less developed regulatory, political and legal framework.

KTZ’s BCA remains underpinned by (1) the company’s status as the monopoly owner and operator of Kazakhstan’s rail infrastructure; (2) its strategic importance to the economy of Kazakhstan; (3) its leadership in its domestic market; and (4) the generally supportive regulatory environment in the country, which allows KTZ to recover its operating costs and obtain passenger transportation subsidies, and links tariff decisions and the group’s investment plans.

– ASSINGMENT OF (P)Baa3 RATING –

The (P)Baa3 rating assigned to the notes is equivalent to the senior unsecured issuer rating of KTZ, as well as to other senior unsecured debt instruments issued by KTZ and KTZ Finance that are currently outstanding and rated by Moody’s. The new notes will be guaranteed by KTZ’s main operating subsidiaries, KTT and Lokomotiv JSC (not rated). The proceeds from the placement of the notes are to be lent by the issuer to members of the KTZ group, predominantly to its logistic operator KTZ Express JSC (not rated) to be used to finance its development projects. The new notes, as well as the obligations of the guarantors, will rank at least pari passu with all other present and future senior unsecured obligations of the issuer and the guarantors,  respectively (save only for such obligations as may be preferred by mandatory  provisions of applicable law).

RATIONALE FOR POSITIVE OUTLOOK

The positive rating outlook reflects the potential for an upgrade of KTZ’s and KTT’ ratings, which would be likely in the event of an upgrade of the sovereign rating, provided that KTZ and KTT maintain financial metrics comfortably within the guidance for the current BCA category and a solid liquidity on a sustainable basis.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The positive outlook on KTZ’s and KTT’s ratings reflects the potential for a rating upgrade should the Government of Kazakhstan be upgraded.

In addition, upward pressure on KTZ’s BCA and rating could arise if conditions in the Kazakhstan freight transportation market remain stable and KTZ is able to maintain adjusted debt/EBITDA sustainably below 2.5x, along with strong liquidity.

Upward pressure on KTT’s rating could also arise if conditions in the Kazakhstan freight transportation market remain supportive, coupled with KTT generating positive free cash flow on a sustainable basis and reducing its normalised leverage.

A weakening of the credit quality of the sovereign or a deterioration in state support could also negatively affect KTZ’s senior unsecured ratings. Moody’s could also lower KTZ’s BCA and rating if its consolidated adjusted debt/EBITDA were to weaken towards 3.5x and its adjusted EBITA/interest weakened to 3.0x on a sustained basis, or if its liquidity were to deteriorate materially.

We could downgrade KTT’s rating if there were a sustained deterioration in KTT’s ability to generate cash flow and in its leverage metrics, or if the company’s liquidity position weakened. In addition, KTT’s rating would be downgraded if we were to downgrade the rating of the Kazakhstan government, or revise downwards our assessment of the probability of the government providing extraordinary support to the company in the event of financial distress.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Surface Transportation and Logistics Companies published in April 2013. Other methodologies used include Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Astana, Kazakhstan, JSC National Company Kazakhstan Temir Zholy (KTZ), is the 100% state-controlled vertically integrated rail group operating the national rail network of the Government of Kazakhstan. In 2013, the group generated revenue of around $5.7 billion, 85% of which was provided by freight transportation services. Headquartered in Astana, Kaztemirtrans JSC (KTT) is a 100% owned subsidiary of KTZ.

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