February 17, 2014 / 1:11 PM / 4 years ago

RPT-Fitch: Devaluation to Pressure Kazakh Utilities' Credit Metrics

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Feb 17 (Reuters) - (The following statement was released by the rating agency)

The recent 19% tenge devaluation will significantly knock the credit metrics of rated Kazakh utilities and transport companies Fitch Ratings says. This is because of the currency mismatch between their debts and revenues and because most Kazakh companies do not use hedging to reduce their exchange-rate risk exposure.

We calculate that over 75% of the debt of Fitch-rated Kazakh utilities and transport companies is denominated in foreign currencies, but most of their cash flow is generated on the domestic market in the local currency. Exposure to exchange-rate risk varies across companies, depending largely on their borrowing policies.

We believe that Kazakhstan Electricity Grid Operating Company (KEGOC), Kazakhstan Temir Zholy and Samruk-Energy have the highest exposure to foreign-currency risk. As a result, we expect their financial profiles to deteriorate the most. We expect the devaluation to increase their gross leverage metrics by about 0.5x on average in 2014 and to reduce coverage ratios by about 3.5x.

Conversely, exporters generating foreign-currency revenue, such as Kazatomprom, or local utilities with no foreign-currency debt, like MEDNC, are likely to fare better. We expect their credit metrics to worsen marginally in 2014, as a result of the devaluation.

The ratings of most Kazakh utilities and transport companies benefit from state support and are therefore unlikely to change as a result of the worsening financial profiles, other things being equal. However, the forecast deterioration of KEGOC’s and Samruk-Energy’s financials may lead to a breach of leverage covenants. This would require the companies to renegotiate their covenants or the state to provide support to prevent them being breached. We expect this support would be forthcoming if needed.

The adverse impact of the tenge devaluation may be exacerbated by a potential increase in interest rates in the domestic debt markets and inflationary pressures. Regulated tariffs may limit the ability of companies to offset higher costs.

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