(Repeat for additional subscribers)
Jan 10 (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
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
National Long-Term Rating: affirmed at 'A(kaz)', Outlook revised to Stable from
Senior unsecured debt in foreign currency: affirmed at 'BB'
Senior unsecured debt in local currency: affirmed at 'A(kaz)'