OREANDA-NEWS. April 29, 2009. Standard & Poor's Ratings Services said that it had affirmed its 'BB+' long-term and 'B' short-term issuer credit ratings and the kzAA-' Kazakhstan national scale rating on Kazakh Agrarian Credit Corp. (KACC). The outlook is negative, reported the press-centre of KASE.

"The Kazakh government's strong support to KACC helps maintain the ratings," said Standard & Poor's credit analyst Boris Kopeykin.

The state owns 100% of KACC. KACC receives capital injections and budget loans from the government. These allow it to carry out its public-policy-based mandate of providing credit to agricultural and nonagricultural businesses in rural areas throughout Kazakhstan.

The ratings are constrained by KACC's rapid expansion of its loan portfolio in potentially risky areas. This has already resulted in a higher estimated 2% share of nonperforming loans (NPLs) in the loan portfolio, up from less than 0.1% in 2007. Lending concentration is high, with the 20 largest borrowers accounting for about 30% of KACC's gross loans. Moreover, KACC's liquidity position is weak, due to the covenants on a US136 million loan from   (A/Stable/A-1).

We use our government-related entities criteria for rating KACC. Our top-down approach reflects the strong likelihood that KACC would receive timely extraordinary support from the national government in case of financial distress. The ratings on KACC are therefore higher than its stand-alone credit quality, which we now asses at the lower end of the 'B' category, due to increasing liquidity risks.

Kazakhstan does not guarantee KACC's obligations, but keeps the company well capitalized. In 2006-2008, the government increased KACC's paid-in capital to Kazakhstani tenge (KZT) 34.4 billion (US 229 million). The company therefore enjoys a strong capital position, with about 70% of loans covered by capital. We expect the government to provide capital injections in 2009-2011. Moreover, as a financial agency, KACC has access to low-cost loans from the government budget, and is set to receive KTZ55.6 billion of loans in 2009 to expand its activities in the agricultural sector.

The loan from Dresdner, due in 2013, that the company attracted in 2008 represents a liquidity risk. It contains a series of covenants that in case of breach would allow the bank to demand repayment ahead of schedule. The loan agreement also contains ratings triggers. It would be almost impossible for KACC to repay the loan ahead of schedule with its own resources.

The negative outlook on KACC reflects that on the (foreign currency BBB-/Negative/A-3; local currency BBB/Negative/A-3; Kazakhstan national scale 'kzAAA'). We expect the government to continue to expand KACC's capital. Furthermore, we do not expect any changes in the policy and regulatory framework that would weaken KACC's public-policy role, at least  until 2011.

"A negative rating action on Kazakhstan, a change in KACC's public-policy role accompanied by signs of weakening government support, or a higher likelihood of breach of one of Dresdner's bank loan covenants, could threaten the ratings," said Mr. Kopeykin.

Ratings upside could result only from a strengthening of the sovereign's credit profile.