TEXT-S&P summary: Samruk-Kazyna
July 30 -
Summary analysis -- Samruk-Kazyna --------------------------------- 30-Jul-2012
CREDIT RATING: BBB+/Stable/A-2 Country: Kazakhstan
Primary SIC: General
Credit Rating History:
Local currency Foreign currency
08-Nov-2011 BBB+/A-2 BBB+/A-2
24-Dec-2010 BBB+/A-2 BBB/A-3
The ratings on Kazakhstan-based government-related entity (GRE) Samruk-Kazyna are equalized with those on the Republic of Kazakhstan (foreign currency BBB+/Stable/A-2; local currency BBB+/Stable/A-2; Kazakhstan national scale kzAAA). This reflects Standard & Poor's Ratings Services view of an "almost certain" likelihood of the government providing timely extraordinary support sufficient to service all debt, should the need arise in any severe downside scenario. Our assessment of the likelihood of extraordinary support is based on our view of Samruk-Kazyna's critical role as the main operator for the government's off-budget financial and economic activities and the company's "integral" link with the government.
Samruk-Kazyna is a 100% state-owned holding company that consolidates almost all of Kazakhstan's state-owned enterprises and manages them for the government. Its role underpins our view of the entity's strategic importance. Samruk-Kazyna's assets include 100%-owned government entities such as:
-- Development Bank of Kazakhstan (DBK) (BBB+/Stable)
-- JSC NC KazMunayGas (KMG; BBB-/Stable)
-- Railway operator Kazazkhstan Temir Zholy (BBB-/Stable),
-- Electricity company KEGOC (BB+/Stable),
-- Telecom operator Kazakhtelecom (BB/Stable),
-- Mining company Kazatomprom, Government-owned investment funds, and
-- Stakes in several key local banks (BTA Bank, Halyk Bank, Kazkommertzbank, Alliance Bank ).
Samruk-Kazyna also manages the government shares in privately controlled companies such as Kazakhmys and the Eurasian Natural Resources Corp. (ENRC).
Samruk-Kazyna's oversight role empowers it to monitor and approve large borrowings and significant transactions for every subsidiary on behalf of the government. The investments and financing decisions of the holding company reflect government policy and the government's direct input via Samruk-Kazyna's board of directors, which the prime minister chairs.
Standard & Poor's estimates Samruk-Kazyna's stand-alone credit profile (SACP) at 'b+'. The key constraining factors include the relatively low stand-alone credit quality of its assets. For example, we assess the stand-alone credit profile of Samruk-Kazyna's largest asset, KMG, at just 'b+', due to high leverage. Samruk-Kazyna also continues to be heavily exposed to the still-weak Kazakh financial sector, which is responsible for about 25% of the parent-level portfolio (including bank stakes, loans and deposits). Samruk-Kazyna has already written off 33% of those investments in 2011.
The company may be exposed to high investment needs at the parent and subsidiary level. Meanwhile, parent-level income is relatively low given the size of its portfolio and debt. In 2011, net dividend and interest income was only $0.8 billion, but it had $12.7 billion in debt by year-end at the parent level (including guarantees). In 2012, Samruk-Kazyna expects to receive higher dividends due to extraordinary payments by Kazakhtelecom and high oil prices. Unlike other holding companies, Samruk-Kazyna has limited flexibility to sell assets to cover its debt service needs, because most of its assets are strategic and unlisted.
On the positive side, most of Samruk-Kazyna's debt is to the Kazakh government and its subsidiaries. Debt to third parties is still relatively manageable at $3.8 billion (about 15% of the portfolio value), including a $1 billion loan from China Development Bank, $0.7 billion in bonds net of bonds issued to subsidiaries, and $2.1 billion in guarantees.
Samruk-Kazyna's SACP reflects our expectation that the company will continue to receive regular government support in the form of long-term loans and capital injections. Most of the holding entity's debt is due to the government or to its subsidiaries. By contrast, the subsidiaries' creditors are mostly third parties that have no recourse to Samruk-Kazyna. Samruk-Kazyna's investments are largely covered by ongoing financing from the government. Kazakhstan's budget law includes provisions to make annual capital injections to the fund. The government is Samruk-Kazyna's biggest creditor. The Kazakh government's plan to hold a "people's IPO" campaign over three years is part of a program to develop the domestic capital markets and diversify economic activity. This is unlikely to affect the ownership structure of Samruk-Kazyna or to change its critical policy role or integral link with the government.
S&P's base-case operating scenario
In 2012, we expect Samruk-Kazyna's ongoing income from interest and dividends to remain modest compared to the size of its portfolio. We understand that most of the fund's problematic assets have already been the subject of large write-offs in 2010-2011, although we do not rule out future write-offs in coming years, depending on the situation in the country's financial sector.
S&P's base-case capital structure and cash flow scenario
We expect that most of Samruk-Kazyna's ongoing investments will be covered by government funding. We understand that although stakes in some of Samruk-Kazyna's subsidiaries will be sold through an IPO in coming years, the cash proceeds will be at the subsidiary level, and Samruk-Kazyna will retain its controlling role. We expect Samruk-Kazyna's debt to third parties to continue growing. Samruk-Kazyna's dividends to the government could also increase from their currently relatively low level, as Samruk-Kazyna passes its higher extraordinary dividend income through to its shareholder, the Kazakh government.
We assess Samruk-Kazyna's liquidity as "adequate", due to its large cash reserves, long-term debt profile, and ongoing support from the state. At year-end 2011, the holding company had cash and short-term bank deposits of 4.3x debt due within one year. At the consolidated level, cash reserves were 1.3x short-term debt. Still, the group's consolidated liquidity and the holding company's liquidity are significantly exposed to the situation in the Kazakh banking sector, which has somewhat stabilized, but remains weak.
The stable outlook reflects our outlook on ratings on the Republic of Kazakhstan and our expectation that our assessment of Samruk-Kazyna's critical role in the economy and integral link with the government is unlikely to change.
We could raise or lower the ratings on Samruk-Kazyna if the ratings on the Republic of Kazakhstan were raised or lowered. Any signs of weakening sovereign support, either because of deviation from Samruk-Kazyna's policy role or because of a weakening link with the government, may change our assessment of Samruk-Kazyna's role, and of its link with the government, and this would result in downward pressure on the rating.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal.
-- Kazakhstan (Republic of), July 30, 2012
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
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