Fitch: 2017 CIS Utilities Outlook Remains Negative

Fitch Rates Kazakhstan's Real Estate Fund Samruk-Kazyna 'BB+'; Outlook Stable

The 2017 sector outlook for utilities in the CIS, excluding Russia, remains negative due to weak sector fundamentals, Fitch Ratings said at its annual conference on EMEA Utilities in Moscow.

Fitch expects most CIS utilities will continue to be under pressure from economic weaknesses, regulatory uncertainties and high exposure to foreign currency risk. We also believe that large capex programmes, which will mostly be debt-funded, as well as forthcoming maturities may face funding challenges in current difficult market conditions.

The ratings of the largest CIS companies incorporate state support. These include, among other things, equity injections, access to funding from state banks and, in some cases, explicit guarantees. Thus any potential privatisation and subsequent weakening of state support may lead to a review of companies’ ratings to reflect standalone financial and operational profiles. In some cases, this may result in negative rating actions.

We estimate most of the companies’ standalone profiles and credit metrics have limited headroom to mitigate economic slowdown, primarily in Ukraine, while financial profiles have also weakened in Azerbaijan and Kazakhstan utilities. Most of the rated CIS companies’ ratings were downgraded in 2016 on sovereign rating actions. A large gap between standalone and current ratings still exists for half of Fitch-rated CIS utilities.

Given the currency mismatch between debt and revenue and the limited use of hedging for most rated CIS utilities, Fitch would expect any potential further local currency weaknesses to negatively affect rated companies’ credit metrics in the near future, all else being equal.

The liquidity position of most CIS utilities is weak as their cash position is not sufficient to cover short-term maturities. Most companies also expect to finance their large capex with the issuance of new debt. The refinancing of DTEK’s 2015 notes and a ‘stand-still’ agreement with banks have helped DTEK to extend its bank debt due in 2016, but significant bank loans and Eurobonds maturities remain in 2017. Samruk-Energy’s USD500m Eurobond also matures in December 2017. Azerenerji’s liquidity is conditional on tangible parental support but state guarantees for the bulk of its debt mitigate liquidity risk.