Fitch Ratings has affirmed the long-term foreign-currency issuer default rating (IDR) of Kazakhstan's state-owned oil and gas company ​KazMunayGas (NC KMG) at BBB- with a stable outlook, the ratings agency said on June 30. KazMunaiGaz Finance Sub BV's foreign-currency senior unsecured rating was also affirmed at BBB-.

“We rate NC KMG on a top-down basis one notch below Kazakhstan (‘BBB’/Stable), reflecting its strong links to the Kazakh state. The support factored into this rating includes an expectation that, in addition to the funds provided for the company's debt reduction programme in 2015, the state will over the medium term run NC KMG with a financial profile that gives it some standalone resilience to shocks,” Fitch explained. The state-owned company, which had a debt of $10.7bn at the beginning of 2016, is seeking to establish tighter control over its upstream arm KazMunaiGas Exploration Production (KMG EP), which is sitting on a cash pile totalling $3.1bn at the end of March. “We do not incorporate the buyout in our base rating case, but the possible deal would be unlikely to affect NC KMG's rating,” Fitch said.

“We forecast that in 2016-2017 NC KMG's funds from operations (FFO)-adjusted gross leverage will be above 10x, and if this is sustained we would expect to widen the notching down from the sovereign. We expect management to take clear steps to reduce this leverage over the next year. If by mid-2017 there is no clear path to deleveraging towards 5x then negative rating action - an outlook revision or downgrade - would be likely,” Fitch suggested.

The absence of an “explicit state guarantee for a significant portion of NC KMG's debt” prevents full rating alignment between Kazakhstan and NC KMG, despite their strong strategic and operational links, the ratings agency said. Its rating approach is based on the expectation that the state will provide sufficient and timely tangible support to the group when needed, it noted.

NC KMG's 2015 performance in upstream, downstream and pipeline transportation was weak, mainly due to sharply lower Brent, high costs and lower dividends from joint ventures (JVs). The company's Fitch-calculated EBITDA dropped by 65% and dividends from JVs by about 40%, resulting in negative free cash flow (FCF) of KZT261bn ($1.2bn) in 2015.

To ensure that NC KMG complies with Eurobond covenants, in 2015 JSC Sovereign Wealth Fund Samruk-Kazyna (‘BBB’/Stable) acquired from NC KMG a 50% interest in KMG Kashagan BV for $4.7bn. “We view this transaction as evidence of the tangible state support already incorporated into NC KMG's ratings.”