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.
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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)
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