Fitch says Kazakh privatisation plan could hurt corporate ratings in long-term

By bne IntelliNews November 18, 2015

Kazakhstan’s privatisation plans could lead Fitch to downgrade state-owned corporates if the government’s stake drops below 50% or parental support from the sovereign weakens substantially, Fitch Ratings has said in a statement. At the same time, the strategic nature of such entities suggests that the government is unlikely to cede control to external shareholders, or fail to support them in case of need. “We also believe that privatisation plans are subject to change, depending on market conditions and other factors,” it said.

First Deputy Prime Minister Bakytzhan Sagintayev announced at the Astana Invest Forum in late October that the government wants to attract investment by floating between 25% and 50%-plus-a-share stakes in national companies that are run by the Samruk-Kazyna sovereign wealth fund and the Baiterek national holding for managing development institutions. The plan will be carried out by January 2018, Sagintayev noted.

“We have in the past taken action based on weakening ownership and support. In November 2014, Fitch revised Mangistau Electricity Distribution Network Company’s (MEDNC, ‘BB+’) outlook to negative to reflect the expectation of the weakening links between MEDNC and the state as a result of Samruk-Energy’s intention to sell its 75% stake in the medium term.”

Fitch said it expected that following the announced partial privatisation, Samruk-Kazyna (‘BBB+’/stable) would retain control in a number of key players. These include Kazakhstan Electricity Grid Operating Company (KEGOC, ‘BBB+’/negative), national company KazMunayGas (NC KMG, ‘BBB’/stable), national railway company Kazakhstan Temir Zholy (KTZ, ‘BBB’/negative), Samruk-Energy (‘BBB-’/stable), and national company Kazakhstan Engineering (‘BBB-’/stable). “We believe it will continue to support them at least until the end of the decade.”

The privatisation announcement reflects an extension to, rather than a change in, policy, Fitch suggested. The Kazakh government has been keen to divest minority stakes in large state-owned companies as well as controlling stakes in smaller ones. In April 2014 it approved a list of 106 companies earmarked for privatisation over 2014-2016. Only 21 companies were privatised in 2014, and further asset sales were postponed mostly because of unfavourable market conditions, tenge devaluation and insufficient investor interest, it noted.

“As per the approved privatisation programme, Samruk-Kazyna plans to sell a minority stake in NC KMG; around 10% in KTZ by 2016; from a 20%-25% stake to the local residents in a so-called People's IPO of Samruk-Energy; 10% minus one share in JSC National Atomic Company Kazatomprom (Kazatomprom, BBB-/Stable) as well as 49% stakes in its three non-core subsidiaries in 2016; 10% in KEGOC; and a 75% stake in MEDNC.”

At end-2014, Samruk-Kazyna placed a 10% stake in KEGOC at the Kazakh public stock exchange. Fitch expects that following the planned IPO, Samruk-Kazyna will maintain a majority stake in KEGOC and that the government's guarantees for part of KEGOC’s debt will remain in place.

“We believe that state support for NC KMG will remain strong after the announced partial privatisation.” KMG carries a substantial social burden, it said, as it sells many products domestically at regulated prices and maintains low-margin operations becasuse of certain social commitments. “It continues to receive tangible state support, eg, in June 2015 it announced the sale of half of KMG Kashagan BV, which holds a 16.88% stake in Kashagan, to Samruk-Kazyna for $4.7bn in cash.”

It was announced earlier this year that NC KMG’s stakes in domestic refineries might be put up for sale. “We view the impact of this potential disposal on NC KMG’s rating as neutral provided that the company receives a substantial part of the disposal proceeds to compensate for its significant investments in refinery upgrades.”

The Kazakh government is considering a wider privatisation for KTZ’s core and non-core operating subsidiaries, such as a sale of a 75% minus one share stake in an entity that would combine KTZ’s two key operating subsidiaries, KazTemirTrans (KTT) and AO Locomotive, instead of selling only KTT, KTZ told Fitch.

“KTZ’s current rating does not assume a disposal of the company’s rolling stock operations as the government has not yet made its final decision and the transaction, even if approved, is unlikely to complete before 2018. As current mainline infrastructure tariff only comprises around 40% of the freight rail transportation tariff, a deconsolidation of AO Locomotive and KTT would materially impact KTZ’s cash flows. Should the transaction go ahead, we would assess its impact on the company’s business risk, credit ratios and the degree of state support incorporated in the rating.”

The impact of privatisation on Kazatomprom's rating is likely to be neutral as only a minority stake is to be offered for sale and Fitch rates the company on the standalone basis and does not incorporate state support, the ratings agency noted.

Samruk-Kazyna currently owns 51% stake in Kazakhtelecom JSC (‘BB’/Positive), so privatisation would likely push the state ownership to below 50%. “We do not factor any parental support in Kazakhtelecom’s ratings.”

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