S&P revises outlook on ratings for KazTransGas to negative
By Elena Kosolapova
Standard & Poor’s Ratings Services said on Feb.20 that it affirmed its ‘BB+’ long-term corporate credit ratings on Kazakh gas utility company KazTransGas (KTG) and its 100 percent owned gas pipeline operator Intergas Central Asia JSC (ICA).
It revised the outlook on both companies to negative from stable.
The agency also affirmed the ‘BB+’ rating on the senior unsecured debt and withdrew the recovery rating of ‘4’.
The rating action follows the downgrade of Kazakhstan and KMG,” said the message from S&P. “We continue to view KTG as having moderately strategic status in the KMG group and enjoying a “moderately high” likelihood of timely and sufficient extraordinary government support from the government of Kazakhstan.”
S&P assumes, however, that in case of financial stress, any extraordinary support to KTG would likely come directly from the government. “Therefore, we base the corporate credit rating on KTG on its stand-alone credit profile (SACP) plus uplift for potential government support, capped at the level of its parent company.”
The revision of the outlook on KTG mirrors that on KMG and reflects the view that if the ratings on KMG are lowered, that would lead to a similar rating action on KTG.
S&P said the company plays an “Important” role for Kazakhstan, given its strategic importance as the monopoly gas supplier in the service area, and ICA’s status as the national trunk gas pipeline operator, as well as “strong” link with the government via full ownership of KTG by its parent, 100 percent state-owned oil and gas champion KMG.“We equalize the ratings on ICA with those on KTG, reflecting the overall creditworthiness of the KTG group. The consolidated approach reflects the companies’ close integration, KTG’s 100 percent ownership of ICA and other major subsidiaries, financial guarantees on much of the group’s debt issued by ICA and KTG, large intragroup cash flows, and an absence of effective subsidiary ring-fencing,” said the message.
The rating action also reflects the assessment of KTG’s SACP at ‘bb’, based on its “fair” business risk profile, “intermediate” financial risk profile, and “negative” financial policy, according to S&P.
In its base case for KTG, S&P assumes: revenue growth of about 15 percent in 2014 supported by devaluation of the tenge and of about 3 percent in 2015; EBITDA margins of 22-25 percent; capital expenditures of about 55 billion-70 billion tenge per year; and dividends of about 12 billion tenge.
Based on these assumptions, S&P arrives at the following credit measures for the company: Standard & Poor’s-adjusted debt to EBITDA of 2x-3x; and FFO to debt of 30-45 percent.
The negative outlook mirrors that on KTG’s immediate parent, KMG, according to the message. A negative rating action on the parent would lead to a similar rating action on KTG, all else being equal, said S&P.
S&P assumes that pressure on KTG’s credit profile also could result from a more aggressive financial profile than we currently anticipate. That would include weakened credit ratios (notably debt/EBITDA rising above 3.0x) due to any unexpected financial underperformance, extensive reliance on short-term funding, or KTG’s increased capital expenditures requiring significant external borrowing and leading to leverage above our expectations.
The capital expenditures can be increased because of a greater need to invest in gas distribution assets or start new large investment projects. The ratings could also come under pressure as a result of any indications of negative interference from KMG, including, but not limited to, inducement to pay excessive dividends, said S&P.
”If we revised down our assessment of KTG’s SACP by one notch, it would lead usto lower the long-term rating to ‘BB’, provided that the sovereign long-term local currency rating and the likelihood of extraordinary financial government support remained the same,” said S&P.
“If we saw signs of weakening state support, we might consider revising down the likelihood of extraordinary government support for KTG,” said the message.
Ratings upside is currently limited by the ratings on the parent, according to S&P. “The outlook might revert to stable only if we change the outlook on KMG to stable.”
Ratings upside might result from better cash flow generation and higher earnings derived from profitable gas-trading operations as the volumes of associated gas sales increase, according to S&P. “Notably, we would expect to see FFO to debt above 45 percent and debt to EBITDA below 2x on a constant basis (without any potential stresses to liquidity) to consider a revision of the SACP upwards to ‘bb+’.”
“However, under our criteria for GREs, this one-notch upward revision of the SACP will not result in rating changes since they are capped by the rating on KMG,” S&P said.