Fitch revises Outlook on Kazakh Central Asia Cement company to Positive
Azerbaijan, Baku, Dec. 17 / Trend E. Kosolapova/
Fitch Ratings has affirmed Kazakh Central Asia Cement's (CAC) National Long-Term Rating at 'BB-(kaz)' and revised the Outlook to Positive from Stable. The agency has also affirmed CAC's senior unsecured 1.5 billion tenge (150.55 tenge = $1) bond rating at 'B(kaz)'.
"The completion of Steppe Cement's capital increase reinforces CAC's financial structure and should allow financing of the investment in the Line 5 refurbishment, while reducing leverage," the company said.
Meanwhile, the group is still exposed to high operational risk due to its concentration on the volatile Kazakh cement market, Fitch said.
Earlier CAC's parent company has successfully completed a 10 million pounds ($16 million) capital increase. The proceeds will be transferred to the operating companies via an intra-group loan and used to finance the completion of the Line 5 refurbishment. The capital increase proceeds and CAC's 1.5 billion tenge ($ 9.5 million) unsecured bond issue completed in November mean that the group $5 million will be financed from the internal cash generation.
Fitch expects FFO net leverage to decline to below 2.0x at end-2012 (from 2.6x at end-2011). The revision of the Outlook to Positive reflects the agency's expectation that gross leverage will materially improve from 2013, when Steppe Cement will repay part of its long-term bank facilities. The agency's forecasts FFO gross leverage will fall below 2.0x in 2013 and 2014.
Meanwhile, CAC's ratings reflect the high operational risk, as the group is present exclusively in the Kazakh cement market that has been extremely volatile in terms of both volumes and prices in recent years.
"The potential realisation of additional capacity from a number of competitors could cause a demand/supply imbalance in the next few years, which could put pressure on cement prices and on industry margins. Moreover, Steppe Cement operates a single cement production plant, thus increasing the operational risk. Lastly, the completion of the Line 5 projects is still subject to execution risk," Fitch said.
The ratings reflect Steppe Cement's leading position in the Kazakh cement market, with a share of 20 percent, and its cost advantage over its competitors, thanks to the favourable location of its Karaganda plant, which has been partially renovated to use the efficient dry technology. The rating and Positive Outlook also reflect the current positive market trend, with double-digit growth in both cement volume and prices in 2012, and the healthy long-term prospects for cement demand in Kazakhstan, backed by solid GDP growth, strong potential for residential demand, and by the upgrading of infrastructure.
The rating of CAC's unsecured bond reflects its subordination to all the other bank facilities of Steppe Cement and the fact that all the major group's assets are pledged. Long-term facilities from HSBC and EBRD are secured against the Karaganda cement plant (the only group's plant) while RCF from local banks are secured against commercial receivables and inventories, thus reducing the recovery expectation for unsecured creditors in case of default.
Fitch rates CAC on the basis of the credit profile and the consolidated figures of Steppe Cement Limited. Fitch considered this to be the most meaningful economic entity in view of both the strong operational ties between Steppe Cement, and its 100 percent controlled subsidiaries CAC and Karcement, and the cross guarantees on their respective debts.