Fitch Affirms JSC Kazakhstan Temir Zholy at ‘BBB-‘; Outlook Stable
Fitch Ratings-Moscow/London-28 April 2017: Fitch Ratings has affirmed JSC National Company Kazakhstan Temir Zholy’s (KTZ) Long-Term Foreign-Currency Issuer Default Ratings (IDR) at ‘BBB-‘ with Stable Outlook. KTZ and Kazakhstan Temir Zholy Finance B.V.’s senior unsecured debt ratings have also been affirmed at ‘BBB-‘.
Fitch classifies KTZ as a credit-linked entity to the Republic of Kazakhstan (BBB/Stable/F3) and its ratings are a notch below the sovereign ratings. Close ties with the state are a key rating factor, which in Fitch’s view imply a high likelihood of support, if needed. This reflects KTZ’s 100% state ownership and its strong legal status; high strategic importance of the company to the Kazakhstani economy; strong control and oversight by the state, and to a lesser extent, integration with the Kazakhstani budgetary system.
Fitch now rates the company using its Public Sector Entity (PSE) criteria to better reflect its policy role and links with Kazakhstan. Fitch previously rated KTZ using its Corporate Parent and Subsidiary Linkage criteria.
Kazakhstan Temir Zholy Finance B.V.’s senior unsecured debt rating is equalised with KTZ’s Long-Term IDR, reflecting Fitch’s view that it constitutes direct, unconditional senior unsecured obligations of KTZ and rank pari passu with all its other present and future unsecured and unsubordinated obligations.
KEY RATING DRIVERS
Legal Status Assessed as Stronger
Via its Sovereign Wealth Fund Samruk-Kazyna (BBB/Stable), Kazakhstan is KTZ’s sole direct shareholder. The company is listed as a strategic enterprise and natural monopoly, subject to state regulation and control. Based on its status and according to national legislation, KTZ shares are not permitted to be sold, pledged or seized without the approval of Kazakhstan’s government and the president. Nonetheless, some of KTZ non-core subsidiaries are referenced in a privatisation plan, while the company’s structure is being optimised.
Integration Assessed as Mid-range
Fitch considers KTZ’s integration into Kazakhstan’s general government sector as moderate. The company’s accounts are not consolidated in the central government’s budget and its debt is not consolidated with state debt. However, there is a track record of state support to the company and we expect KTZ to continue receiving tangible financial support in the medium term.
KTZ receives on-going annual subsidies, mostly compensating part of its passenger transportation’s cost, which accounted for less than 3% of its revenue in 2015-2016. The company received equity injections to fund state-initiated infrastructure projects of KZT196 billion and KZT27 billion of budget loans in 2015-2016.
Strategic Importance Assessed as Stronger
KTZ is an integrated railway operator and the nation’s largest natural monopoly company. It manages access and infrastructure for railway transportation, provides dispatching, locomotive traction, long-distance and suburban passenger transportation in Kazakhstan.
The company is strategically important for Kazakhstan’s economy. Its assets accounted for about 6% of GDP in 2015 while KTZ employs about 140,000 people, making it one of the largest commercial employers in the country.
According to the government renewed development agenda, KTZ is going to be gradually transformed into a national transportation and logistics operator, combining multi-mode freight forwarding capacity (ie sea ports, airports, auto-routes and ferry terminals). The transformation is aimed at enhancing country’s export potential and capturing international transit opportunities.
Control Assessed as Stronger
KTZ operates under close control and oversight from the state. This includes approval of its strategy and budgets, appointment of the board and the company’s president, setting tariffs and authorisation of capex as well as a state audit of the company’s operations. The eight-member company’s board is chaired by the first deputy prime minister of Kazakhstan and is composed of representatives of the state and four independent directors.
KTZ’s operational performance improved in 2016 underpinned by recovered profits, stabilised tenge and financial support from the state. KTZ’s freight turnover (million tonne kilometres) stabilised in 2016 at 188,159 (2015: 189,759). The company’s funds from operations (FFO) generation improved markedly up to KZT154 billion in 2016 (2015: KZT81 billion), while its business profile continues to benefit from the company’s monopolistic position, fairly diversified product and customer mix and balanced exposure to domestic, transit and export markets.
KTZ’s credit profile remains constrained by the still evolving long-term tariff system and its exposure to commodity market risks, FX risk, and limited geographical diversification. To a large degree, the company is dependent on state financial support to fund capital intensive infrastructure development projects.
KTZ issued KZT50 billion (out of an approved programme of KZT200 billion) a debut long-dated CPI-linked 10-year domestic infrastructure bonds to finance its long-term infrastructure projects in 2016 in order to diversify its debt portfolio and reduce FX exposure. Fitch expects KTZ’s additional issuances of KZT- and/or RUB-denominated debt in 2017-2019 in order limit exposure to currency exchange swings.
In 2016 company’s total risk decreased 10% compared to previous year, amounting to KZT1,240 billion, while its net debt/EBITDA ratio improved to 5.3x (2015: 9.5x). Debt structure is historically dominated by FX-denominated debt (77% of 2016 net overall risk), including Eurobonds and loans. KTZ’s liquidity buffer reduced with 2016 cash and deposits decreasing to KZT50 billion (2015: KZT68 billion).
A rating change would be triggered by changes to the sovereign ratings. Any dilution of linkage with the sovereign through weakening of legal status, strategic role or public control, which could lead to reduction of state support, could result in the ratings being notched down from the sovereign ratings.
Kazakhstan Temir Zholy Finance B.V.’s senior unsecured rating is equalised with Kazakhstan Temir Zholy’s Long-Term Foreign-Currency IDR and therefore will move in tandem with KTZ’s Long-Term Foreign-Currency IDR.
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International Local and Regional Governments Rating Criteria – Outside the United States (pub. 18 Apr 2016)
Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016)
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