S&P affirms credit ratings of Agricultural Credit Corporation at level "ВВ+/В"; outlook "Stable"

/Standard & Poor's, London, July 10, 15, heading by KASE/ – Standard & Poor's Ratings Services said today that it affirmed its 'BB+/B' long- and short-term foreign and local currency issuer credit ratings on Kazakh Agrarian Credit Corp. (KACC). The outlook is stable. We also affirmed the Kazakhstan national scale rating on KACC at 'kzAA-'. The ratings on KACC are primarily supported by the institution's strategically important status within KazAgro Group. In our view, the ratings on KACC also benefit from the high likelihood that the government of Kazakhstan would provide timely and extraordinary support to the company in a financial stress scenario. These strengths are balanced by KACC's weak stand-alone credit profile (SACP) of 'b+', primarily reflecting its concentration in Kazakhstan's volatile agricultural sector. We expect KACC to maintain its importance for KazAgro Group: the institution is one of the largest in the group and its primary mandate of channeling government support to the agricultural sector and rural areas remains important to the group's long-term strategy. We understand that KACC's role in direct lending to end-borrowers will gradually diminish with a larger fraction of financing coming through commercial banks, allowing effective utilization of the banks' existing infrastructure and distribution networks. For example, as of 2014 the banks have largely taken on KACC's previous financing of spring harvest work. At the same time, we expect KACC to remain virtually the only lender to agricultural credit unions (ACUs). When KACC was established in 2001, the government envisioned that at some point the institution would cease its participation in ACUs when the latter found alternative funding sources. However, this scenario seems unlikely over the medium term. KACC will also play an important role in implementing some new mechanisms aimed at supporting the agricultural sector estab days) will improve moderately to 18%-20% of total loans in the next two years, compared with 23% at the end of 2014, supported by the disbursement of new loans and gradual workout of old problem loans. The short-term rating is 'B'. We assess KACC's funding as below average compared with that of local bank peers, and its liquidity as moderate. KACC does not have access to a central bank funding mechanism, nor does it have a deposit license. As a government-owned company, it is funded primarily by budget loans provided via KazAgro Holding, which made up around 71% of the funding base at the end of 2014. We assess KACC's liquidity as moderate because it is highly volatile and subject to cyclicality in cash flows. Cash and money market instruments represented only 1.5% of KACC's asset base at the end of 2014 compared with 11% on Sept. 30, 2014. A partial compensating factor is that KACC has low dependency on market financing as the majority of funding comes from the parent. The stable outlook reflects our view of KACC's stand-alone creditworthiness remaining unchanged while the institution continues to be strategically important for the KazAgro Group. Any weakening in KACC's SACP, which could follow a material deterioration in the credit quality of its loan book and sharply increased credit costs, might prompt us to consider lowering the ratings on KACC. A marked shift in KACC's strategy, leading to a scaling down of lending operations and of the company's importance for the government and KazAgro Holding, might also result in a negative rating action, although we do not think this is likely in the next 12-18 months. A downgrade of Kazakhstan (and consequent downgrade of KazAgro Holding) would not necessarily result in a similar action on KACC, which we currently rate two notches lower than the sovereign. This is because we would still expect KazAgro Holding to provide support to its subsidiary KACC, owing to KACC's strategically important status within KazAgro Group. We might consider a positive rating action if we observed an increase in the importance of KACC's role within KazAgro Group over the longer term. Our view of a stronger probability of extraordinary government support also might lead us to take a positive rating action on KACC, although we do not currently expect this. Additional contact: International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com [2015-07-15]