Nov 25 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Kazakhstan Mortgage Company's (KMC) Long-term foreign currency rating to 'BBB-' from 'BB+' and its Long-term local currency rating to 'BBB' from 'BBB-'. The Short-term foreign currency rating has been upgraded to 'F3' from 'B'. The Outlooks on the Long-term ratings are Stable.
Fitch has also upgraded the long-term local currency rating of outstanding senior debt to 'BBB' from 'BBB-' (ISIN KZ2C00001048 KZ2C00000180 KZ000A0TZWY9 KZ000A0TZW44 KZ2C00002152 KZ2C00002178 KZ000A0TZWX1 KZ2C00001030 KZ000A0TZW51 KZ2C00001071 KZ2C00002160 KZ2C00001741 KZ2C00001022); and affirmed the long-term local currency rating of outstanding subordinated bond (ISIN KZ2C00001733) at 'BBB-'.
KEY RATING DRIVERS
The upgrade reflects growing sovereign support to KMC as evidenced by up to KZT107.8bn equity increase over the 2013-2016 period and a tighter integration of the company with the State's housing policy. Following the upgrade, KMC's ratings are two notches below the State's Long-term foreign and local currency IDRs at 'BBB+' and 'A-' respectively, reflecting relative independence of KMC's debt policy. Thus management takes decisions on KMC's debt, which is not consolidated with government debt. Fitch used its public-sector entities rating criteria and applies a top-down approach in its analysis of KMC.
The rating on KMC's KZT10bn domestic subordinated bond is notched down a level from KMC's Long-term local currency rating 'BBB-' of KMC, reflecting the greater potential loss severity than other outstanding KMC bonds, given the issue's subordinated and junior status.
KMC's ratings reflect the company's 100% ownership by the government, its strategic importance in social housing through its involvement in the national 'Affordable Housing Programme 2020' and government support. The company received KZT14bn of equity injection in July 2013 and expects an additional KZT11bn by year-end and up to KZT82.8bn during 2014-2016.
KMC is also indirectly supported by the state as about 76% of its outstanding bonds are held by state-owned institutions such as state pension funds, Development Bank of Kazakhstan (BBB/F3/Stable) and Samruk-Kazyna (BBB+/F2/Stable) group companies. In 2013 KMC placed three bond issues with a total value of KZT37.7bn, of which Development Bank of Kazakhstan and state pension funds purchased KZT21.6bn and KZT12.1bn respectively.
KMC acts as the government's agent in providing affordable housing and plays a crucial role in implementing government social housing programmes for low- and middle-income households. The company has initiated construction of about 150,000 sq m of housing units in seven cities of Kazakhstan in 2013. Additionally, KMC contributes to the stability and development of Kazakhstan's financial sector by refinancing mortgage loans of commercial banks, by securitisation of mortgages and by issuing bonds.
An upgrade may result from an upgrade of the sovereign ratings, or continuation of government support in the form of capital injections or other forms of funding that would lead to an improvement of the company's financial position and profitability.
A reversal of state support that is primarily manifested in a delay to, or lack of, the equity injection as envisaged over the 2014-2016 could lead Fitch to widen notching from the sovereign to three notches, resulting in a downgrade. A credit analysis on KMC is available at www.fitchratings.com.