Fitch Ratings has affirmed Kazakhstan-based JSC Samruk-Energy's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+', and foreign-currency senior unsecured rating at 'BB'. The Outlooks on the IDRs are Stable. The full list of rating actions is provided at the end of this commentary.
The affirmation reflects continued strong strategic and operational ties between the company the Kazakh state and our expectation that the company would refinance its USD500 million Eurobonds falling due in December 2017 or the government would provide timely financial support to Samruk-Energy, in case of insufficient cash inflows.
Fitch views Samruk-Energy's liquidity at end-2016 as mostly dependent on the credit facilities to fully cover the forthcoming Eurobond repayment and failure by the company to secure refinancing may result in negative rating action. Samruk-Energy's standalone profile remains weak due to a heavy debt burden and high exposure to FX.
KEY RATING DRIVERS
Eurobond Repayment: Samruk-Energy's cash and deposits of KZT57.4 billion (KZT32.4 billion of which is held at holding level) at end-2016, together with available credit facilities and privatisation proceeds, are sufficient to cover short-term repayments of KZT193 billion, including KZT167 billion (USD500 million) of maturing Eurobonds at holding level.
The company has committed credit facilities at holding level from EBRD of KZT35 billion or EUR100 million, as well as uncommitted credit lines from several local banks totalling KZT104 billion. Samruk-Energy also expects privatisation proceeds of KZT40.5 billion and has already received bids for most of this amount.
We expect the Kazakh state to support the company in case cash inflows are insufficient. Samruk-Kazyna plans to issue a comfort letter stipulating the ability to provide Samruk-Energy funds in the form of equity injection or a loan at subsidised interest rates.
Standalone Profile Remains Weak: We view Samruk-Energy's standalone profile as weak and commensurate with the mid 'B' rating category, significantly below the government-supported IDR. The credit profile is constrained by weak credit metrics, high exposure to FX and by the operating and regulatory environment in Kazakhstan. We expect Samruk-Energy's funds from operations (FFO) adjusted gross leverage to remain on average at around 6.0x in 2017-2020, and its FFO fixed charge cover to average around 2.5x in 2017-2020.
Tight Covenants: The company's debt/EBITDA covenant set in the loan agreement with the EBRD is tight due to Samruk-Energy's weak financials. The covenant is currently set at 4.5x and Samruk-Energy had already received a waiver for 2016. We expect covenant pressure to persist in the following years. This will be more reflective of the company's standalone mid 'B' category profile. Failure to obtain a waiver or revise the covenant may lead to a multi-notch downgrade of ratings.
Privatisation Impact on Leverage Neutral: At end-2016 Samruk-Energy announced a tender for the sale of its power distribution assets, ie, MEDNC (BB/Negative) and VK REK including supply company Shygysenergotrade, Aktobe CHP power plant and greenfield gas producer Tegis Munay for the total initial price of at least KZT40.5 billion.
Samruk-Energy has received bids for MEDNC, VK REK and Aktobe CHP. At end-September 2016 these subsidiaries accounted for 3% of Samruk-Energy's debt and 10% of the company's EBITDA. Fitch rating case envisages the privatisation of MEDNC, VK REK and Aktobe CHP in 2017. After deconsolidating debt of disposed companies and accounting for privatisation proceeds, we expect the leverage impact will be neutral.
Top-Down Approach: We continue to view the operational and strategic links between Samruk-Energy and the state as strong, which supports the application of our top-down rating approach. The strength of the ties is underpinned by the company's strategic importance to the Kazakh economy as the company controls about 40% of total installed electricity generation capacity and 36% of total coal output in the country. On the other hand, Samruk-Energy has weaker strategic and operational ties with the state than JSC National Company KazMunayGas (BBB-/Stable) and JSC National Company Kazakhstan Temir Zholy (BBB-/Stable), and has less guaranteed debt than KEGOC (BBB-/Stable). Therefore, a difference of two notches is deemed appropriate.
Continued State Support: The government demonstrated its support through equity injections of around KZT18 billion in 2016 and through lowering the interest rate in 2015 on Samruk-Kazyna's KZT100 billion loan to 1% from 9%. Failure to support Eurobond repayment, if needed, may lead us to revise our approach to bottom-up and may lead to a multi-notch downgrade.
Samruk-Energy's closest peers are Kazakhstan-based regional players Joint Stock Company Central-Asian Electric-Power Corporation (CAEPCo, B+/Stable) and Kazakhstan Utility Systems (KUS, BB-/Stable) and Russian-based Inter RAO (BBB-/Stable), the latter also consolidated state-owned assets in the past. Samruk-Energy and its peers are subject to regulatory uncertainties influenced by macroeconomic shocks and possible political interference. CAEPCo and KUS are rated on a standalone basis, and Inter RAO is 'BB+' standalone plus one-notch uplift for state support. Samruk-Energy's standalone profile is in the mid 'B' category due to a heavy debt burden and high exposure to FX. Samruk-Energy's strong operational and strategic links with the government justify a top-down approach.
Fitch's key assumptions within our rating case for the issuer include:
-0% tariff growth in electricity generation for 2017-2018 and 3% growth thereafter;
-Electricity production to increase at 2% in 2017 and 3% thereafter, in line with GDP growth rate;
-Inflation-driven cost increase (including coal);
-Privatisation of MEDNC, VK REK and Aktobe CHP; privatisation of Tegis Munay not considered;
-30% dividend payout ratio;
-Average capex of KZT60 billion over 2017-2020, above management's guidance.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Positive sovereign rating action.
-Strengthening of legal ties (eg state guarantees for a larger portion of the company's debt or cross default provision).
-A clearly defined debt-management policy that provides for a centralised debt-management function, which would be positive for senior unsecured ratings.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-Negative sovereign rating action.
-We may consider changing the rating approach to bottom-up in case of diminishing or irregular state support, which may result in further deterioration of the company's credit profile, tight liquidity position and failure of timely debt repayments.
LIQUIDITY AND DEBT STRUCTURE
High Prior Ranking Debt: The ratio of secured and prior-ranking debt at operating company level is estimated at 2.0x of trailing 9M2016 EBITDA. We forecast that it would have exceeded Fitch's threshold of 2x at end-2016. This, along with uncertainties regarding planned asset disposals and lack of clarity and consistency in group debt management, leads to notching the foreign-currency senior unsecured rating down by one level from Samruk-Energy's Long-Term Foreign-Currency IDR.
FX, Local Banks Exposure: Samruk-Energy is exposed to currency risk as about 60% of the company's KZT387billion debt at end-2016 was in foreign currencies (USD) while all revenue is generated in tenge. The company does not use hedging, and the currency mismatch risk is only partly mitigated by holding KZT36billion of USD-denominated cash and bank deposits. The vulnerability to FX fluctuations will be lower by end-2017 as the majority of refinancing sources currently considered by the company are tenge-denominated. The cash and deposits are mostly kept in local banks, including Halyk Bank of Kazakhstan (BB/Stable), Tsesnabank (B/Stable), etc.
FULL LIST OF RATING ACTIONS
Long-Term Foreign and Local Currency IDR affirmed at 'BB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B';
National Long-Term Rating affirmed at 'AA(kaz)'; Outlook Stable
Foreign and local currency senior unsecured rating affirmed at 'BB'
National senior unsecured rating affirmed at 'AA-(kaz)'