15 Dec 2009 15:19

S&P revises Kazakhtelecom outlook to stable, affirms ratings

MOSCOW. Dec 15 (Interfax) - Standard & Poor's Ratings Services has revised its outlook on Kazakhstan's largest telecoms operator Kazakhtelecom (JSC) to stable from negative, the agency said in a press release.

At the same time, the 'BB' long-term corporate credit and 'kzA' Kazakhstan national scale ratings on Kazakhtelecom were affirmed.

The 'BB' and 'kzA' issue ratings on Kazakhtelecom's Kazakhstani tenge (KZT) 45.5 billion (about $306 million) unsecured notes were also affirmed and the '3' recovery rating on the notes is unchanged.

"The outlook revision reflects the improvement of Kazakhtelecom's liquidity position, following its recent successful refinancing," said Standard & Poor's credit analyst Alexander Griaznov.

In November 2009, Kazakhtelecom issued a KZT45.5 billion bond, which allowed early repayment of the $350 million syndicated loan with original maturity in June 2010. The early repayment has led to a meaningful improvement of Kazakhtelecom's liquidity position, because it means the company will have minimal maturities in 2010 and 2011, which can be fully serviced out of operating cash flow.

The 'BB' rating on Kazakhtelecom is based on the company's stand-alone credit profile, which S&P assesses at 'BB-', and on the agency's view that there is a "moderately high" likelihood that the government of the Reoubkic of Kazakhstan (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A-3; Kazakhstan national scale 'kzAAA') would provide timely and sufficient extraordinary support to Kazakhtelecom, if Kazakhtelecom encountered periods of financial distress.

Kazakhtelecom's stand-alone credit profile is constrained by the weakening macroeconomic conditions in Kazakhstan, declining profitability, and increasing leverage. It also is a sign of the company's relatively weak operating performance, reflected among other things by declining profitability. It also incorporates the company's exposure to foreign exchange and interest rate risks. On June 30, 2009, adjusted debt was KZT99 billion.

The key supporting factor for the stand-alone credit profile is Kazakhtelecom's dominant market position in its key revenue segments, which include local and long-distance telephony, data transmission, Internet, and other value-added services. Kazakhtelecom's improved, expanded network and vertically integrated business model support its market leadership, which will be hard to challenge over the next three years.

"We expect Kazakhtelecom to continue to generate stable and predictable cash flows, based on its dominant position in a market with very limited competition," said Griaznov.

S&P also expects the company to carefully manage its capital-expenditure budget to allow positive free operating cash flow generation. At this rating level the agency expects the company to maintain a ratio of debt to EBITDA of less than 2.5x (this ratio was 2.0x for the 12 months ended June 30, 2009).

An increasing aggressive investment appetite that led to meaningfully negative free operating cash flow would likely lead S&P to lower the ratings. The agency would also likely lower the ratings in case of continuously weak operating performance, marked in particular by further erosion of profitability.

The possibility of an upgrade is limited over the next 12 months. In the longer term, it would require meaningful deleveraging, moderation of the investment appetite, and prudent financial policy management.