Fitch Affirms Sovereign Wealth Fund Samruk-Kazyna at ‘BBB’; Outlook Stable
Fitch Ratings-Moscow/London-28 April 2017: Fitch Ratings has affirmed Kazakhstan’s JSC Sovereign Wealth Fund Samruk-Kazyna’s (SK) Long-Term Foreign- and Local- Currency Issuer Default Rating (IDR) at ‘BBB’, National Long-term rating at ‘AAA(kaz)’ and Short-Term Foreign-Currency IDR at ‘F2’. The Outlooks on the Long-term ratings are Stable. Fitch has also affirmed SK’s senior unsecured domestic bonds at ‘BBB’/ ‘AAA(kaz)’.
Fitch rates Samruk-Kazyna using a top-down rating approach under its ‘Rating of Public-Sector Entities – Outside the United States’ criteria, to reflect the credit links between SK and its sole shareholder (the sponsor, under the PSE criteria), Republic of Kazakhstan (BBB/Stable/F2). Accordingly, SK’s ratings are equalised with the sovereign. SK manages key Kazakhstani assets in oil and gas, mining, energy and transportation sectors and acts as a quasi-fiscal institution, redistributing funds from the state to the economy.
The ratings reflect Fitch’s expectation of extraordinary support from the state, which exercises direct control and oversight of SK. The Stable Outlook reflects that on the sovereign ratings.
KEY RATING DRIVERS
Legal Status Assessed as Stronger
SK is a public joint stock company, 100% owned by Kazakhstan in accordance with a special law. It is the state’s quasi-fiscal vehicle, channelling funds from the state to the national economy. Its institutional mission is to improve sovereign wealth, by increasing the long-term value of the portfolio companies and their effective management. We do not expect these features to significantly change in the foreseeable future.
Integration Assessed as Stronger
The close links between SK and Kazakhstan’s finances are demonstrated by equity injections and subsidised loans, in addition to serving as a quasi-sovereign guarantor on vital state-sponsored economic development projects and government’s agent on privatisation of non-core assets. SK mostly passes subsidised loans from the National Bank and the National Fund through to subsidiaries to aid more efficient asset management of its portfolio.
Since its inception in 2008, SK has received KZT3,765 billion of shareholder contributions, which formed significant part of its total assets and equity (KZT7,350 billion and KZT5,269 billion as end-2016, respectively).To this end SK’s accumulated investments in subsidiaries and joint ventures as of end-2016 were KZT5,527 billion. This highlights SK’s key role in redistribution of state-originated funds to the economy.
Control Assessed as Stronger
The eight members of SK’s board of directors are appointed by the sole shareholder with the country’s prime minister serving as the board’s chairperson. SK’s board comprises key national officials as well as three independent directors, while the government of Kazakhstan approves the company’s financial statements, retains control over the fund’s strategic decisions, mandates SK’s key policies on debt, dividends and investments, appoints its audit committee and external auditor, monitors and controls the use of state-originated funds.
Strategic Importance Assessed as Stronger
In Fitch’s view, SK is particularly important in implementing Kazakhstan’s policy for economic development and diversification. Notably, through the government’s adherence to progressively lower dependence on hydrocarbons as the main source of national revenue and minimisation of the share of state-owned entities in the economy. As of end-2016 SK held assets equal to 17% of GDP.
The government does not provide an explicit guarantee for the company’s debt, but views this debt as a moral obligation of the state and considers it quasi-sovereign liabilities. Additionally, the limited size of SK’s total financial debt relative to national GDP (2.3%) means extraordinary support from Kazakhstan, in case of need, is very likely. We consider the implementation of the announced privatisation of non-core assets merger will not weaken the strategic importance as the national economy’s concentration will reduce while its diversification improves.
The group has delivered growth in revenues, demonstrating operating profitability over the last three years. In particular, SK’s net profit/total equity and reserves returned to 1.7% in FY16 having peaked at 12.9% in FY15 (FY14: 1.3%), due to the one-off recognition of a gain on disposal of a share in subsidiary (10% of KazMunaiGas swap with the National Bank of Kazakhstan).
SK’s management expects that future capital and investment expenditure will largely be funded by operating cash, state-originated funding flow and divestment of non-core assets. As of end 2016, SK’s total financial debt was stable at KZTb1,952 billion (2015: KZT1,775 billion), with a leverage ratio (calculated as the long-term debt/total equity and reserves) of 19%, which has been on a downwards trend since 2012 when it was 37%. SK’s liquidity position is solid, with readily available cash and cash equivalents at KZT236 billion plus deposits of KZT796 billion at end-2016.
SK’s ratings are equalised with those of Kazakhstan. Therefore any upward change in sovereign ratings would be reflected in SK’s ratings.
Conversely, negative rating action on Kazakhstan or an adverse change in SK’s legal framework leading to weaker support or diminished integration with the state could also trigger a downgrade.
+7 495 956 9994
Fitch Ratings CIS Ltd
26 Valovaya Street
+7 495 956 9980
+49 69 768076 111
Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: email@example.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: firstname.lastname@example.org.
Additional information is available on www.fitchratings.com
International Local and Regional Governments Rating Criteria – Outside the United States (pub. 18 Apr 2016)
National Scale Ratings Criteria (pub. 07 Mar 2017)
Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001