S&P affirms ratings of Kazakhtelecom, outlook revised to stable from positive

February 16. KASE. Standard & Poor’s

S&P affirms ratings of Kazakhtelecom, outlook revised to stable from positiveStandard & Poor’s Ratings Services revised the outlook on Kazakhstan-based telecommunications operator Kazakhtelecom to stable from positive. We affirmed the ‘BB’ long-term foreign and local currency corporate credit rating and the ‘kzA+’ Kazakhstan national scale rating.

The outlook revision on Kazakhtelecom reflects our view that a positive rating action on the company will be unlikely in the next 12 to 18 months. The affirmation of the ratings on Kazakhtelecom follows improvement in the company’s management and governance practices. In our opinion, Kazakhtelecom is implementing its mobile business strategy in a more credible and predictable way, and has secured a 10-year Kazakhstani tenge (KZT)37 billion (approximately $200 million) loan from the Kazakh Development Bank to support the rollout of its nationwide 4G network, which will require meaningful investment. We have therefore revised our management and governance assessment on the company to “fair” from “weak” and, as a result, we are raising our stand-alone credit profile (SACP) on Kazakhtelecom to ‘bb’ from ‘bb-‘.

We continue to view Kazakhtelecom as a government-related entity (GRE) and view the likelihood of timely and sufficient extraordinary financial support from the  Kazakhstani government, if needed, as “moderate.” Nevertheless, following the  lowering of the sovereign rating to ‘BBB’, we no longer confer a one-notch uplift  for state support into the long-term rating on Kazakhtelecom, in accordance with  our criteria.

The stable outlook reflects our expectation that Kazakhtelecom’s credit metrics will remain commensurate with the revised ‘bb’ SACP, including a ratio of Standard & Poor’s-adjusted debt to EBITDA of below 2x, and that its liquidity will  remain adequate. We could revise the outlook to negative if Kazakhtelecom’s  leverage were to increase well above our base-case scenario expectations as a  result of higher investments or extraordinary dividend distribution.

We see ratings upside as limited over the next 12 months because this would be triggered by a one-notch upgrade of the sovereign. Such an upgrade is unlikely because our outlook on the long-term rating is negative.