OREANDA-NEWS. On August 28, 2007 Fitch Ratings has changed JSC Kazakhtelecom's ("Kaztel") Outlook to Stable from Positive. Its Long-term foreign and local currency Issuer Default ratings (IDR) are affirmed at 'BB' and the Short-term foreign currency IDR at 'B', reported the press-centre of KASE.

"The change of Outlook to Stable from Positive reflects the uncertainty regarding the timeframe for break even of its greenfield mobile business, a marked upward revision in capex and steep tariffs cuts for international calls", says Frederic Beaumelou, Associate Director in Fitch's TMT team. In addition to the deployment of a mobile infrastructure, higher than expected fixed-line capex include ongoing digitalisation, extension of the local loop, installations of DSLAMs and rollout of a next generation network. While Fitch believes there is scope for a third GSM operator in Kazakhstan, the mobile market has become increasingly competitive, which partly explains the slow start of Mobile Telecom Services (MTS). Thus, Fitch does not expect any improvement in the company's financial ratios by end 2008, hence the stabilisation of the Outlook.

Nevertheless, the company maintains a dominant position in fixed-line telecommunications and its net financial leverage of 1,5x is adequate for its rating category. Its strong market position appears sustainable in view of the lack of competition within the fixed-line area and limited liberalisation of the telecom sector. Although the rapid economic expansion should further raise the demand for telecom services, volume growth will be hampered by the announced sharp tariffs cuts for international and internet services. The slated prices increases for the cheap local and residential services are not expected to fully offset the tariffs cuts for the international and long distance calls.

The company has recently announced it is contemplating selling its 49% stake in the leading mobile operator GSM Kazakhstan in order to finance its organic growth. In view of the uncertainty in terms of timing and extent of the disposal, Fitch currently treats this mooted transaction as a credit event.

Last year's acquisitions of the entire capital of MTS and additional shares in Nursat and Altel have raised net debt by KZT39,9bn to KZT66,4bn at end 2006. As a result, net debt to EBITDA deteriorated to 1,5x from 0,75x. Gross debt of KZT70,8bn was comprised of bank debt, finance leases and included a KZT8.7bn vendor credit on the sale of MTS. Since acquisitions were mainly financed through a USD220m one year bank loan and a vendor financing due in February 2007, short term debt amounted to KZT43,8bn at end December 2006. The company restored a sound liquidity position and lengthened the maturity profile of its indebtedness by signing a USD350m three-year syndicated bank loan in July 2007.

Kaztel is the fixed-line incumbent operator in Kazakhstan. The State holds an indirect 51,9% controlling interest through JSC State Holding Samruk. In 2006, revenue increased by 14,4% thanks to organic growth and acquisitions of the small CDMA operator, Altel and the telecom operator, Nursat. EBITDA margin of 39,5% improved slightly from 2005. Its 51%-owned mobile subsidiary, MTS, launched its operations in February 2007 under the Neo brand and recorded around 60,000 customers in June.