Baku, Azerbaijan, Nov. 25
By Elena Kosolapova - Trend: International Rating Agency Fitch Ratings has revised the Outlook on Kazakhstan-based Mangistau Electricity Distribution Company JSC's (MEDNC) Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'BB+', the agency reported on Nov. 25.
Long-term local currency IDR affirmed at 'BBB-', Outlook revised to Negative from Stable.
National Long-term rating affirmed at 'AA(kaz)', Outlook revised to Negative from Stable.
Short-term foreign currency IDR affirmed at 'B'
Foreign currency senior unsecured rating affirmed at 'BB+'
Local currency senior unsecured rating, including that on KZT1.7bn (180.87 tenge = $1) and KZT2.4bn bonds, affirmed at 'BBB-'
"The revision of the Outlook reflects our expectation of the weakening of the links between MEDNC and its ultimate parent, Kazakhstan (BBB+/Stable) as a result of the intention to sell the 75 percent stake owned by 100 - percent state-owned JSC Samruk-Energy (BBB-/Stable) in 2015," the agency said.
Fitch notes, that the loss of a controlling stake by the parent may result in Fitch taking a bottom-up approach to the rating instead of the top-down approach that is currently applied.
MEDNC's ratings are notched down from Kazakhstan's by three notches, reflecting the moderate strength of the links between the company and ultimate parent. MEDNC's direct parent, indirectly fully state-owned Samruk-Energy, has not provided tangible financial assistance to MEDNC since Fitch widened the notching from the sovereign rating to three notches from two in 2011. Samruk-Energy does not view MEDNC as strategic and is likely to sell its stake in MEDNC during 2015.
Weaker links with the ultimate parent, such as a reduction of Samruk-Energy's stake in MEDNC to a less than controlling interest may result in Fitch reconsidering its rating approach to one of bottom-up rather than top-down, as the agency currently applies. In April 2014, Kazakhstan's government approved the list of 106 companies earmarked for privatisation over 2014-2016. The terms and pricing details of these assets sales are not yet disclosed. Nine of these companies are owned by Samruk-Energy, including MEDNC.
MEDNC is currently 75-percent owned by Samruk-Energy. Fitch expects privatisation to be a two-stage process, the first stage a sale of a 24 percent stake + 1 share by Samruk-Energy via a public offering, the second stage being the remaining 51 percent to be sold to a strategic shareholder via an auction possibly as soon as at the beginning of 2015.
Fitch views MEDNC's standalone profile to be commensurate with the weak 'BB' rating category, which reflects a balance between its relatively small size, industry and customer concentration, average projected credit ratios, the current supportive tariff regime and good quality counterparties. MEDNC's credit profile is supported by its near-monopoly position in electricity transmission and distribution in the Region of Mangistau, one of Kazakhstan's strategic oil and gas producing regions. It is also underpinned by prospects for economic development and expansion in the region, in relation to both oil and gas and transportation, and by favourable three-year tariffs. MEDNC further benefits from limited foreign-exchange risks and from the absence of interest-rate risks.
The Negative Outlook reflects the possible sale of MEDNC by Samruk Energy, and the likelihood change to the rating approach that would result.
The main factors that may individually or collectively lead to positive rating action are as follows:
- Stronger links with the ultimate parent.
- Enhancement of the business profile, such as diversification and scale with only modest increase in leverage would be positive for the standalone profile.
The main factors that may individually or collectively lead to negative rating action are as follows:
- Negative rating action on Kazakhstan's ratings.
- Weaker links with the ultimate parent, such as a reduction of Samruk-Energy's stake in MEDNC to less than 50 percent or an elevated dividend payout, insufficient tariffs and increased capex contributing to weaker credit metrics. This may result in Fitch reconsidering its rating approach to one of bottom-up from the top-down that is being currently applied.
- Deterioration in MEDNC's FFO adjusted leverage to 4x or above and FFO interest cover to 2.0x or below on a sustained basis would be negative for the standalone profile.
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