Standard & Poor's Ratings Services today affirmed its long- and short-term local and foreign currency credit ratings on Kazakhstan-based government-related entity Samruk-Kazyna (SK) at 'BBB+/A-2'. The outlook is stable.
We also affirmed the Kazakhstan national scale rating at 'kzAAA'.
Under our criteria for rating government-related entities (GREs), the ratings on Kazakhstan-based Samruk-Kazyna (SK) are equalized with those on the Republic of Kazakhstan (foreign currency BBB+/Stable/A-2; local currency BBB+/Stable/A-2; Kazakhstan national scale 'kzAAA'). This reflects our view of an "almost certain" likelihood of the government providing timely extraordinary support sufficient to service all debt, if needed.
Our assessment of the "almost certain" likelihood of extraordinary support is based on:
- SK's "critical" role for the government of Kazakhstan. SK is the government's main vehicle for implementing the strategic industrialization agenda and long-term economic sustainability and diversification agenda. It controls essentially all strategic assets in Kazakhstan.
- SK's "integral" link with the government, which reflects our view that the 100% government-owned SK essentially acts on behalf of the government. The government plays a decisive role in SK's operations. We believe that a default by SK would cause the government significant reputational damage.
SK is a 100% state-owned holding company. It consolidates almost all of Kazakhstan's state-owned assets, and manages these assets on behalf of the government. Among the many assets it manages are national oil company JSC NC KazMunayGas, railway operator Kazazkhstan Temir Zholy, electricity company KEGOC, telecom operator Kazakhtelecom, and mining company Kazatomprom.
In our view, SK performs an important public policy role, which is formally defined by law. It plays a central role in meeting the government's key economic, political, and social objectives. Indeed, SK has been implementing key national policies since it was established in 2008, under a presidential decree. It played a key role in implementing the government's $20 billion stabilization plan, adopted in 2008 during the crisis. It has also been playing a pivotal role in implementing the government's $20 billion anti-crisis stabilization plan, and the government's Development Plan 2020--aimed at industrialization and economic diversification. Many of the assets SK controls play an important economic role providing essential infrastructure and services.
In our view, SK acts essentially on behalf of the government. It is highly integrated with the government, and the government plays a decisive role in its operations. By law, all board members are heads of central executive bodies and the prime minister of Kazakhstan is the chairman. Although the government plans to sell minority stakes in several subsidiaries of SK through the "People's IPO" program launched in 2012, we understand that SK will retain control over these assets. Moreover, there are no plans to even partially privatize SK.
In 2012, the government refocused SK's priorities concerning its core business and core competencies. It now concentrates solely on the government's large industrialization program. As part of this strategy, the government is transferring development institutions, such as Development Bank of Kazakhstan (DBK) away from SK and into a newly established national development agency.Moreover, SK has been tasked with selling the government's stakes in the banking sector, acquired during the crisis years of 2008-2009. We do not expect that either of these developments will affect our view of the role and link between SK and the government, and we do not expect any impact on the "almost certain" likelihood that the government of Kazakhstan would provide timely and extraordinary support to DBK.
We assess SK's stand-alone business profile (SACP) as 'b+', based on its "fair" business risk profile, "highly leveraged" financial risk profile, and "adequate" liquidity, as our criteria define these terms. The key factors constraining SK's stand-alone business risk profile include the only-fair credit quality of its major investments such as KazMunayGas, KTZ, and KEGOC, and its significant dependence on the oil and gas segment, which generates most of the group's profits.
These risks are mitigated by SK's control over essentially all strategic industrial assets in Kazakhstan--a portfolio that is as diversified as it can be. An important factor in our assessment of the financial risk profile is our expectation of these assets' profitable operations and ongoing support from the government via favorable regulations and access to commercially attractive assets. The key factor constraining our assessment of financial risk is the lack of transparency and predictability regarding SK's financial policy, notably future investments, disposals, or asset transfers to sister GREs. SK's accounts show a number of large write-offs and reversals, reflecting, among other things, the revaluation of assets in the financial sector and the BTA Bank restructuring.
We assess SK's liquidity as "adequate," with sources of liquidity to uses of liquidity above 1.2x.
At Dec. 31, 2012 (the latest reporting date), key sources of liquidity at the parent level included:
- Cash balances of Kazakhstani tenge (KZT) 432 billion, of which KZT395 billion is with the central bank, and short-term bank deposits of KZT160 billion.Dividend and interest income from subsidiaries is likely to be lower than in 2012, because income in that year was boosted by one-offs.
- We understand that SK recently received $200 million from China Development Bank to finance a matching loan to Kazakhmys, and placed a KZT255 billion bond with the government.
Key uses of liquidity at Dec. 31, 2012, included:
- Relatively low short-term debt of KZT82 billion. Most debt to parties other than the government or subsidiaries is medium or long term. In addition, the full amount of liabilities guaranteed by SK is KZT480 billion.
- Investments, including a KZT249 billion (30%) stake in Kazzink and a $200 million loan to Kazakhmys already made in early 2013.
The stable outlook reflects our outlook on the long-term sovereign ratings on Kazakhstan and our expectation that SK's "critical" role in the economy and "integral" link with the government is unlikely to change.
We could raise or lower the ratings on SK if we raised or lowered the sovereign ratings. Any signs of weakening sovereign support, either because of a deviation from SK's policy role or the government changing how it manages its assets, or because of a weakening link with the government, may change our assessment of SK's role in and link with the government. This would lead to downward pressure on the ratings.