16 Sep 2009 20:05

S&P cuts KazAgroGarant to 'BB-/kzA-', affirms short-term 'B' and stable outlook

MOSCOW. Sept 16 (Interfax) - Standard & Poor's Ratings Services has lowered its long-term issuer credit and Kazakhstan national scale ratings on KazAgroGarant, a state-owned niche market guarantee provider based in the Republic of Kazakhstan (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A-3; Kazakhstan national scale 'kzAAA') to 'BB-' and 'kzA-' from 'BB' and 'kzA', the ratings agency said in a statement.

The outlook is stable. The short-term issuer credit rating is affirmed at 'B'.

The ratings were removed from CreditWatch with negative implications, where they had been placed on CreditWatch on June 16, 2009. Before the CreditWatch placement, the outlook was stable.

"The downgrade and removal from CreditWatch follow our application of our revised methodology for rating government-related entities and also result from KazAgroGarant's weakened stand-alone credit profile," said Standard & Poor's credit analyst Boris Kopeykin.

The ratings on KazAgroGarant reflect the agency's expectations of a "moderately high" likelihood of timely and sufficient extraordinary support to KazAgroGarant from the Kazakh government in case of financial distress, as well as KazAgroGarant's "weak" stand-alone credit profile, which S&P assesses at 'B'.

The ratings continue to be constrained by KazAgroGarant's untested business model; the exposure of its investments to the Kazakh banking sector; and a high guarantee risk concentration, with the largest guarantee larger than the company's actual capital.

In accordance with S&P's criteria for government-related entities, the agency's view of a "moderately high" likelihood of extraordinary government support is based on our assessment of KazAgroGarant's:

"Limited importance" for the government. This is because the company is small and has just over Kazakhstani tenge (KZT) 2 billion in capital and KZT4.5 billion worth of guarantees issued. The company's public-policy mandate is relatively narrow: KazAgroGarant is one of eight government-related entities (subsidiaries of KazAgro Holding) that the government created to support the agricultural sector. Its specific purpose is to be the only provider of warehouse receipt guarantees on agricultural commodities. There is a track record of government support to KazAgroGarant in the form of recurring capital injections, although the equity increase planned for 2009 was postponed until 2010.

"Very strong" link with the Kazakh government. The Kazakhstan government wholly owns KazAgroGarant through KazAgro Holding and its subsidiaries, and privatization is not on the agenda. The government tightly monitors KazAgroGarant's activities through KazAgro Holding.

The 'B' stand-alone credit profile reflects KazAgroGarant's untested business model; the exposure of its investments to the Kazakh banking sector; and a high guarantee risk concentration, with the largest guarantee larger than the company's actual capital. However it also incorporates the ongoing support from the Kazakh government in the form of capital injections and KazAgroGarant's commitment to a policy of "no direct debt" and, so far, no calls on its guarantees.

The outlook on KazAgroGarant is stable because the outlook on the Republic of Kazakhstan is stable. S&P expects the government to continue to expand KazAgroGarant's capital, although the exact amount of injections for 2010-2011 might fluctuate. Furthermore, S&P does not expect any changes in the policy and regulatory framework that would challenge our expectations of a "moderately high" probability of support to KazAgroGarant from the government in case of financial distress.

"A negative rating action on Kazakhstan, or a change in our expectations of extraordinary support to KazAgroGarant from the government due to signs of weakening government support, could pressure the ratings," Kopeykin said.

A weakening stand-alone credit profile caused by significant deterioration in capitalization levels or investment portfolio quality could also lead to negative rating actions.

Ratings upside could result from a stronger sovereign credit profile, or a higher probability of extraordinary government support for KazAgroGarant, which S&P does not currently expected.