RPT-Fitch revises Kazakhtelecom's outlook to stable; affirms at 'BB'
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Jan 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised the Outlook on Kazakhtelecom JSC's (Kaztel) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BB'. A full list of rating actions is at the end of this release.
Kaztel is a strong fixed-line incumbent with a near monopoly position in the traditional telephony and high broadband market share operating in a benign regulatory environment. The revision of the Outlook is driven by a significant reduction in the company's total debt due to repayments from cash on the balance sheet, and certain capex cuts as well as an overall revision of the company's capex plan resulting in a milder leverage spike. Fitch no longer expects that the company's total debt/EBITDA ratio will exceed 2.5x.
KEY RATING DRIVERS
Strong Incumbent Positions
Kaztel's is likely to maintain its dominant positions in the fixed-line segment, helped by benign regulation and the shortage of alternative networks. Kaztel estimated its fixed-line telephony market share at a high 92% at end-2012. Fixed-to-mobile substitution is a key threat, and this will drive modest fixed-line disconnections and pricing pressures, in our view.
Positive Broadband Prospects
The Kazakh broadband market still retains strong growth potential, driven by relatively low broadband penetration in the country (26% of households as of end-2012). Kaztel's much relied-on ADSL technology allows it to roll-out broadband services ahead of its peers. Broadband leadership will be supported by a rapid roll-out of fibre infrastructure in key territories. The segment's revenue growth is likely to lag subscriber additions as we expect the company's currently inflated tariffs to remain under regulatory and competitive pressure in key cities.
Ambitious Mobile Strategy
Kaztel's newly launched LTE service may face only limited operating success while being the key leverage driver in 2014-2016. The Kazakh mobile market is well penetrated with 3G services and is highly competitive. It will be a challenge to migrate CDMA customers to a GSM network as currently planned. There is a risk that churn may increase and the company is likely to run significant one-off costs.
Leverage Increase Likely
High capex on the back of LTE roll-out and fixed-line network upgrades will push free cash flow (FCF) deep into negative territory in 2013-2014, and will continue weighing on cash generation in 2015-2016. Leverage is likely to rise, but we project it will remain below 2.5x total debt/EBITDA.
Weak Domestic Banking System
The Kazakh domestic banking system is weak, implying a lack of local funding and resultant high FX risks, few committed credit facilities and potentially limited access to deposits. Consequently, we primarily focus on the company's gross debt metrics in our analysis.
Well-Spread Maturity Profile but High FX Risks
Kaztel's debt profile is well spread with no medium-term debt redemption peaks. The company is likely to finance its LTE capex with new debt which may change this. Exposure to foreign currency risk is high, with 89% of debt denominated in or pegged to foreign currencies at end-3Q13.
Off-Balance Sheet Liability a Concern
Kaztel issued a USD300m guarantee to China Development Bank covering a loan to Kazakhmys, its sister company, under an agreement with its controlling shareholder, Samruk-Kazyna (BBB/Stable) in 2009. This guarantee will be triggered if Samruk-Kazyna defaults on its payments to China Development Bank. Samruk-Kazyna later issued a cross-guarantee to Kaztel promising to pay back any amounts that it had to pay to China Development Bank. Fitch notes this situation as a corporate governance concern, and this is factored into Kaztel's ratings.
Weak Parent-Subsidiary Linkage
Kaztel's ratings reflect its standalone credit profile. Kaztel is of only limited strategic importance for Kazakhstan, while operating and legal ties with its controlling shareholder, government-controlled Samruk-Kazyna, are weak. Although indirect government control is a positive credit factor, it does not justify any notching up, in our view.
A protracted rise in gross leverage to above 2.5x total debt/EBITDA and 3x FFO adjusted leverage, and/or a material increase in refinancing risks may lead to negative rating action. A sustained decrease in gross leverage to below 1.0x total debt/EBITDA and 1.5x FFO adjusted leverage and successful development of the mobile segment demonstrating strong operating and financial performance could be rating positive.
FULL LIST OF RATING ACTIONS
Long-Term IDR: affirmed at 'BB', Outlook revised to Stable from Negative
Short-Term IDR: affirmed at 'B'
Local currency Long-Term IDR: affirmed at 'BB, Outlook revised to Stable from Negative
National Long-Term Rating: affirmed at 'A(kaz)', Outlook revised to Stable from Negative
Senior unsecured debt in foreign currency: affirmed at 'BB'
Senior unsecured debt in local currency: affirmed at 'A(kaz)'