S&P downgrades ratings of Samruk-Energy from "ВВ+" to "ВВ"; outlook "Stable"
20.02.15 17:42
/Standard & Poor's, Moscow, February 19, 15, heading by KASE/ – Standard &
Poor's Ratings Services said today that it had lowered its long-term corporate
credit rating on Kazakhstan-based energy group Samruk-Energy JSC to 'BB'
from 'BB+' and the Kazakhstan national scale rating to 'kzA+' from 'kzAA-'. The
outlook is stable. At the same time, the 'B' short-term corporate credit rating
was affirmed.
We also lowered the issue rating on the group's US$500 million senior
unsecured notes due 2017 to 'BB' from 'BB-'. The recovery rating on the notes
remains unchanged at '4' .
That rating action is in line with our methodology for government-related
entities (GREs) and follows our lowering of the sovereign rating on Kazakhstan
by one notch. It also reflects our view that there is a high likelihood that
Kazakhstan's government would provide timely and sufficient extraordinary
financial support to Samruk-Energy in the event of financial distress. This is
underpinned by the group's market position, which consolidates 47% of installed
power generation capacity in the country. The rating also reflects our
assessment of the group's stand-alone credit profile (SACP) at 'b+', based on
our view of its business risk profile as "weak" and its financial risk profile
as "aggressive."
Samruk-Energy is a vertically integrated group of companies with business
segments including coal mining and electricity generation, distribution, and
supply. Our assessment of Samruk-Energy's business risk profile as "weak"
reflects our view of its evolving corporate structure, with a limited track
record of operations in their current form, an aged asset base, limited
visibility at this stage over the regulatory framework after 2015, and the
transitional features of the domestic power market. Supporting factors include
the group's solid domestic market position, average profitability (which is
higher than peers in the Commonwealth of Independent States), and high vertical
integration through its long position in coal, electricity generation,
distribution, and supply operations.
Our assessment of Samruk-Energy's financial risk profile as "aggressive"
incorporates our view of the group's ambitious investment program (over which
it has limited flexibility as it has been approved by the regulator) and its
fairly high debt-to-EBITDA ratio.
Our view that there is a "high" likelihood of extraordinary financial support
from the government reflects Samruk-Energy's:
- "Important" role for the government, given its strategic position as a
leading provider of electricity in Kazakhstan; and
- "Very strong" link with the government, giventhe 100% ownership of the
group through government investment vehicle Samruk-Kazyna, our expectation
that the government will maintain majority ownership for at least the next
two years, the government's involvement in strategic decision-making, and the
risk to the sovereign's reputation if Samruk-Energy were to default. This is
supported by historically strong financial support from the government in the
form of equity injections, asset transfers, low-interest-rate loans, debt
guarantees, and the provision of financial aid and tax benefits.
The stable outlook reflects our view that the risks associated with Samruk-
Energy's ambitious investment program, pressure on the group's credit metrics,
and high debt leverage are balanced by our view of the high likelihood that the
group would receive timely and sufficient extraordinary support from the
government of Kazakhstan if needed. This is underpinned by Samruk-Energy's
strategic importance for and strong track record of receiving financial aid from
the government of Kazakhstan, as well as its solid market position and benefits
of vertical integration.
According to our methodology for rating GREs, if the sovereign rating is further
lowered to 'BBB-', it would not automatically result in a similar rating action
on Samruk-Energy, provided that Samruk-Energy's SACP and likelihood of
extraordinary state support remain unchanged.
Downward pressure on the ratings might arise if the group adopts more
aggressive financial policies that aren't commensurate with our current
expectations, for example, if increased investments led to leverage exceeding 5x
debt to EBITDA or FFO to debt below 12%, or if the liquidity and maturity
profiles weakened. Credit metrics could also deteriorate from Samruk-Energy not
receiving sufficient ongoing government aid via such supportive measures as
conversion of shareholder debt to equity, favorable price caps, and equity
injections. We could then change our comparable ratings modifier to neutral
from positive, which would trigger a downward revision of the group's SACP to
'b'.
However, according to our methodology for rating GREs, Samruk-Energy's
SACP would have to fall to 'b-' to result in a one-notch downgrade, all else
being equal.
If we revised the likelihood of extraordinary state support to "moderately
high," it would also lead us to lower our rating on Samruk-Energy, if the SACP
and sovereign ratings remain unchanged. Such a revision might stem from a
demonstrated weaker willingness of the government to provide financial support
to the group, a revision of government strategies regarding development of the
private sector, or enhanced privatization above our expectations during the
"People's IPO."
If we revised up our assessment of Samruk-Energy's SACP to 'bb-', and the
group's credit metrics sustainably improved to a level commensurate with a
"significant" financial risk profile, including debt to EBITDA of 3x-4x and FFO
to debt in the 20%-30% range, it could trigger an upgrade of Samruk-Energy. We
think that these factors could occur in case of further conversion of loans to
equity, further equity contributions, or lower investments implemented by the
group, with Samruk-Energy's liquidity and maturity profiles also remaining
adequate.
Primary Credit Analyst:
Sergei Gorin, Moscow (7) 495-783-4132;
sergei.gorin@standardandpoors.com
Secondary Contact:
Elena Anankina, Moscow (7) 495-783-4130;
elena.anankina@standardandpoors.com
Additional Contact:
Industrial Ratings Europe;
Corporate_Admin_London@standardandpoors.com
[2015-02-20]