S&P downgrades Kazakh railway operator to ‘BB-‘

S&P downgrades Kazakh railway operator to 'BB-'

The International ration agency S&P Global Ratings lowered its long-term corporate ratings on Kazakhstan’s national railroad company, Kazakhstan Temir Zholy (KTZ), and its core subsidiary, freight-wagon owner Kaztemirtrans (KTT), to ‘BB-‘ from ‘BB’, the agency reported on Oct.20. The outlook is negative.

The agency also lowered its Kazakhstan national scale ratings on these entities to ‘kzBBB+’ from ‘kzA’. At the same time, S&P lowered the issue ratings on KTZ’ senior unsecured bonds, including those issued by its financing subsidiary, Kazakhstan Temir Zholy Finance B.V., to ‘BB-‘ from ‘BB’.

“The rating action primarily reflects our view that the likelihood that the Kazakhstan government would provide timely and sufficient extraordinary support to KTZ in a potential stress scenario has weakened to high from very high previously,” S&P said.

The agency noted that Kazakh government has tolerated a sharp deterioration of KTZ’ stand-alone credit quality since the beginning of 2015 and did not provide the funds to reduce its leverage. KTZ’ adjusted debt-to-EBITDA ratio increased to about 8.6x at end-2015 from about 3.4x at end-2014, and its funds from operations (FFO)-to-debt ratio dropped to about 7.5 percent in 2015 from 24.7 percent in 2014.

In addition, S&P believes that government oversight may not be sufficient to monitor debt repayments at all levels of the group, notably within the smaller subsidiaries, which may have material amounts of debt service. The agency noted that the government did not intervene in a timely manner to prevent late payment by Vostokmashzavod (VMZ), a relatively small subsidiary of KTZ, by more than five business days on its payments to Halyk Bank on its loan of $31.9 million partially guaranteed by the parent company.

S&P noted that its saw lower visibility on government support and heightened risk of support being delayed should it be needed again in cases of financial stress.

However the agency assesses the likelihood of extraordinary government support as high based on its assessment of KTZ’ as a very important role in Kazakhstan’s economy as the national railroad company responsible for about one-half of all freight traffic in Kazakhstan; and its strong link with the Kazakh government, which wholly owns KTZ indirectly via the sovereign wealth fund Samruk-Kazyna.

The negative outlook on KTZ and KTT mirrors the outlook on Kazakhstan.

S&P could lower the ratings on KTZ if it downgrades the sovereign. The agency could also downgrade KTZ if it believes the likelihood of extraordinary government support has weakened further, because of the state’s reduced willingness or ability to provide tangible financial aid, subsidies, and equity injections. Lessened government support could also result from KTZ’ partial privatization.

The agency would likely revise its outlook on KTZ to stable if it revised its outlook on the sovereign to stable.

100% of KTZ’s shares are owned by the state through the Samruk-Kazyna fund. Adamas Ilkyavichyus – Chairman of the Board of Directors JSC “Kazakhstan Temir Zholy” – Kazakhstan National Railways, Member of the Modernisation / Transformation Board. Askar_Mamin – Management Board of “Kazakhstan Temir Zholy” JSC.