S&P affirmed ratings of Samruk-Energy; outlook negative

December 30. KASE. Standard & Poor’s. Moscow

S&P affirmed ratings of Samruk-Energy; outlook negativeStandard & Poor’s Ratings Services said today that it has affirmed its ‘BB+/B’ long-term and  short-term corporate credit ratings and ‘kzAA-‘ Kazakhstan national scale rating  on Kazakhstan-based energy group Samruk-Energy JSC. The outlook is negative.

The affirmation reflects our continued view that there is a “high” likelihood that  the Kazakh government would provide timely and sufficient extraordinary financial support to Samruk-Energy in the event of financial distress. This is underpinned by the company’s market position, which consolidates 47% of installed power generation capacity in the country. The rating also reflects our assessment of the group’s stand-alone credit profile (SACP) at ‘b+’, based on our  view of its business risk profile as “weak” and its financial risk profile as  “aggressive.”.

In the first half of 2014, Samruk-Energy acquired 50% of the coal-fired electricity  generator Ekibastuz GRES-1, which allowed the company to gain 100% ownership of this power station, the largest in the country. The $1.3 billion transaction was financed with a Kazakh tenge (KZT) 200 billion loan and a KZT21 billion equity injection, both provided by Samruk-Energy’s 100% shareholder, Samruk-Kazyna. In October 2014, Samruk-Energy received another KZT100 billion equity injection aimed at repaying half of the loan. However, even  after this transaction, we expect the ambitious investment program (announced  at KZT433 billion in 2014-2017) to result in heavily negative free operating cash  flow (FOCF) generation and weakened credit metrics and financial risk profile.  We have therefore revised our assessment of the financial risk profile to  “aggressive,” from “significant” previously.

The negative outlook reflects that on the sovereign rating. According to our methodology for government-related entities, we will lower the rating on Samruk-Energy by one notch if the sovereign rating is downgraded to ‘BBB’, provided that  the SACP on Samruk-Energy and likelihood of extraordinary state support remain unchanged.

The negative outlook further reflects the risk that Samruk Energy might not receive sufficient ongoing state support via such supportive measures as conversion of shareholder debt to equity, favorable price caps, and equity injections, and therefore might not be able to strengthen its credit metrics over  the coming two years. We might then remove the positive comparable ratings modifier, triggering a downward revision of the group’s SACP to ‘b’ and a one-notch lowering of the corporate credit rating, provided that our assessment of the  likelihood of extraordinary state support is unchanged.

We could revise the outlook to stable if the outlook on the sovereign rating is revised to stable. In addition, such an outlook revision would be contingent on the  restoration of credit metrics to levels we consider commensurate with a “significant” financial risk profile, including debt to EBITDA between 3x and 4x and FFO to debt in the 20%-30% range . This could occur in case of further conversion of loans to equity, further equity contributions, or lower investment levels at the Samruk-Energy level.

We might lower the ratings if the sovereign rating is lowered to ‘BBB’. Pressure on the SACP might arise if the group adopts more aggressive financial policies that aren’t commensurate with our current expectations, for instance if increased  investments led to a debt leverage position exceeding 5x debt to EBITDA or FFO  to debt below 12%, or if the liquidity and maturity profiles weaken.

According to our methodology for rating government-related entities, a lowering of Samruk-Energy’s SACP to ‘b’ would lead to a one-notch downgrade, all else being equal.

If we revised the likelihood of extraordinary state support to “moderately high,” it  would also result in the lowering of our rating on Samruk-Energy, if the SACP  and sovereign ratings remain unchanged. Such a revision might stem from a  demonstrated weaker willingness of the government to provide financial support  to the group, revision of government strategies regarding development of the  private sector, or enhanced privatization above our expectations during the  “People’s IPO”.