Baku, Azerbaijan, Oct. 24
By Maksim Tsurkov - Trend:
Fitch Ratings international rating agency has affirmed Kazakhstan Engineering National Company JSC's (KE) Long-term foreign currency and local currency Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB', respectively, with Stable Outlooks, said the message of the agency.
Fitch has also affirmed the foreign and local currency senior unsecured ratings at 'BBB-' and 'BBB', respectively, and the Short-term foreign currency IDR at 'F3', according to the agency.
KE's ratings are based on Fitch's Parent Subsidiary Linkage methodology and are notched down two notches from the rating of its ultimate 100 percent shareholder, the Republic of Kazakhstan (BBB+/A-/Stable), said the message. Therefore, any perceived or real weakening of state support - in particular a delay in or smaller expected capital injections from the state - could have a negative effect on the ratings.
Fitch deems KE's linkage with its parent as moderate to strong due to the state's control, strategic importance of the company to the government's ambition to expand the country's industrial base and diversify the national economy as well as the tangible financial support that has been demonstrated and pledged by the state.
The two-notch differential reflects the lack of debt guarantees provided by the state and the slightly lower priority KE would likely receive compared with key natural resources, utilities or infrastructure companies, whose ratings are notched down once from the sovereign.
Fitch believes that on a standalone basis, KE's rating would likely be at the middle to high end of the 'B' category, reflecting its weak business profile, negative free cash flow (FCF), moderately high leverage and adequate liquidity.
KE's business profile is characterized by the company's small size, limited product range, lack of long-term high-tech development achievement and little customer diversification, all of which cap the company's standalone rating in the 'B' category, said the agency.
Nevertheless, the agency acknowledges the growth that the group is likely to experience in the coming years as the Kazakhstan government makes KE the focal point of the nation's industrialization and export drive. This, together with the technological know-how KE is acquiring from various joint venture partners, should help visibly improve the business profile over the medium to long term.
KE's financial profile is weak and indicative of a high 'B'' category manufacturing company. It is characterized by high leverage (7.7x at the end of the first half of 2015), negative FCF generation, adequate and growing underlying profitability, volatile working-capital flows and heavy investment needs. Given the expansion projected in the short- to medium-term, the capex requirements of the company are unlikely to be met from internally generated cash and may rely on external funding.
For 2015, Fitch expects the funds from operation (FFO) margin to be around low double digits while FFO adjusted gross and net leverage are expected to be around 8x and 2x, respectively. The company's bonds worth 10 billion tenge maturing in December 2015 are expected to be repaid with cash reserves, while its $200 million bond which matures in the fourth quarter of 2016 is expected to be partly refinanced.
The company had around 35 billion tenge of Fitch-adjusted cash at the end of the first half of 2015, which was more than sufficient to cover the repayment of 10 billion tenge bond and short-term lease maturities. Nevertheless, the $200 million bond maturity in December 2016 as well as the group's investment needs leading to neutral to slightly negative FCF in the short- to medium-term, mean that KE will likely need external funding over the coming 12 months.
To this end, KE may be reliant on the equity injections pledged by the government, which Fitch assumes will be forthcoming under its rating approach and without which, the company's liquidity position will deteriorate materially, said the message.
The Stable Outlook on the Long-term IDR reflects that on the Republic of Kazakhstan.
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