S&P downgrades Kazakh Samruk-Energy to ‘BB-‘

KazMunayGas Rating Lowered To 'BB-' On Weakening State Support

The international rating agency S&P Global Ratings lowered its long-term corporate credit rating on Kazakhstan-based electricity group Samruk-Energy JSC to ‘BB-‘ from ‘BB’, and placed it on CreditWatch with negative implications, S&P reported Dec. 22.

‘B’ short-term corporate credit rating was affirmed.
The agency also lowered its Kazakhstan national scale long-term rating to ‘kzBBB+’ from ‘kzA’ and its issue rating on Samruk-Energy’s $500 million senior unsecured notes due December 2017 to ‘BB-‘ from ‘BB’, and placed both on CreditWatch with negative implications.

“The downgrade primarily reflects Samruk-Energy’s weaker credit metrics and a lack of visible ongoing government support, which we had previously factored in the rating,” S&P said.

Contrary to the rating agency’s expectations, Samruk-Kazyna, Samruk-Energy’s sole owner, has not converted a Kazakhstani tenge (KZT) 100 billion (about $300 million) shareholder loan to equity.
Therefore, S&P estimates Samruk-Energy’s debt to EBITDA will be at about 5.5x by year-end 2016. As a result, the rating agency has removed the positive one-notch adjustment it previously included, based on its comparable ratings analysis. This has led the agency to revise downward its assessment of the company’s stand-alone credit profile (SACP) to ‘b’ from ‘b+’.

The CreditWatch placement reflects potential pressures on Samruk-Energy’s liquidity and credit quality if the company fails to ensure availability of funds sufficient to cover the $500 Eurobond, which matures on Dec. 20, 2017, or doesn’t receive timely and sufficient financial support for this from the government or Samruk-Kazyna, which would reflect a weakening link to the government.
The ratings currently reflect that S&P expects the company will improve its performance in 2017, such that debt to EBITDA is at about 5x, thanks to higher tariffs already approved by the regulator, growing electricity demand, an increase of export sales, and asset disposals.

S&P views the company’s business risk profile as weak. The group is not shielded from competition on the market, because the price-cap mechanism does not guarantee cost recovery. On the positive side, the rating agency notes high vertical integration in coal mining, electricity generation, distribution, and supply operations; a leading market position in several regions; and a relatively solid share of 32 percent of the country’s installed capacity.

At this stage, S&P continues to believe there is a high likelihood that Samruk-Energy would receive timely and sufficient extraordinary support from the Kazakh government, but this assessment could change depending on the government’s strategy with regard to any support for Samruk-Energy’s upcoming Eurobond maturity.

According to S&P, Samruk-Energy has an important role for the government, given its strategic position as a leading provider of electricity in Kazakhstan; and a very strong link with the government, which fully owns Samruk-Energy through Samruk-Kazyna. The rating agency expects that the government will maintain majority ownership of Samruk-Energy for at least the next two years. S&P also considers the government’s involvement in strategic decision-making at the company, the risk to the country’s reputation if Samruk-Energy were to default, and the government’s track record of providing strong financial support to Samruk-Energy in the form of equity injections, asset transfers, low-interest-rate loans, debt guarantees, and tax benefits.

The CreditWatch placement reflects pressures on the ratings if by the end of the first quarter of 2017, Samruk-Energy is not able to ensure liquidity sufficient to cover the Eurobond’s redemption in December 2017, or if the government (likely via Samruk-Kazyna) doesn’t provide timely and sufficient extraordinary financial support, such as a shareholder loan or equity injections. The latter could also indicate weakening of the link to the government and result in reassessment of the likelihood of extraordinary state support.

S&P could affirm the ratings if Samruk-Energy ensures, in advance, availability of funds sufficient for the Eurobond’s redemption, and continues to enjoy government support.
The rating agency aims to resolve its CreditWatch in about three months.