OREANDA-NEWS. October 30, 2009. Standard & Poor's Ratings Services said that it had assigned its 'BB' local currency senior unsecured debt rating to the proposed Kazakhstani tenge (KZT) 45.5 billion (about US300 million) bond to be issued by (BB/Negative/--; Kazakhstan national scale 'kzA'). We are assigning a national scale rating to Kazakhtelecom and we have also assigned the same 'kzA' Kazakhstan national scale rating to the proposed issue, reported the press-centre of KASE.

At the same time, a recovery rating of '3' was assigned to this debt, indicating Standard & Poor's expectation of meaningful (50%-70%) recovery for creditors in the event of a payment default and incorporating the Kazakh jurisdiction-related recovery rating cap.

"The company expects to issue the bond for 10 years with a floating coupon of 900 basis points over LIBOR," said Standard & Poor's recovery analyst Carlo Castelli. "The amount of the issue could change over time, because it is linked to the fluctuation of the U.S. dollar/KZT exchange rate."

Kazakhtelecom does not plan to hedge its foreign exchange risk exposure at this stage. The bond is to be repaid in equal semiannual tranches after the two-year grace period. The bond contains certain covenants, including financial limitations and change-of-control provisions.

The proceeds from the bond will be used to refinance Kazakhtelecom's syndicated loan facility of US350 million, maturing in midyear 2010. We understand that issuing the bond will lead to a temporary breach of covenants under the above-mentioned loan. However, Kazakhtelecom expects to fully repay the loan by the end of 2009.

The bond is rated at the same level as the 'BB' long-term corporate credit rating on Kazakhtelecom.

At the same time, the bond will be ranked behind the secured debt at the level of the parent company and the level of subsidiaries, which amounts to not more than KZT15 billion in total.

The rating is based on preliminary information and is subject to our satisfactory review of final documentation. In the event of any changes to the amount or terms of the bond, the recovery and issue ratings might be subject to further review.

The ratings on Kazakhtelecom reflect its strong link to the government and important role in Kazakhstan's economy, as the largest provider of telecommunications services in the country. We assess the company's stand-alone creditworthiness at 'BB-'. Kazakhtelecom's stand-alone credit profile is constrained by the weakening macroeconomic conditions in Kazakhstan, declining profitability, and increasing leverage, resulting mainly from a decrease in EBITDA.

These risks are mitigated by the company's dominant market position in its key revenue segments, which include local and long-distance telephony, data transmission, Internet, and other value-added services. We also account for Kazakhtelecom's participation in the national mobile market with its 49% stake in GSM Kazakhstan, which pays sizable and regular dividends.

Recovery Analysis

We have valued the business as a going concern, as we believe that Kazakhtelecom's business model would remain viable after default due to its leading market position, valuable nationwide backbone network and customer base. We believe that a hypothetical default would most likely be driven by significant leverage (as a result of assumed significant currency depreciation) combined with operational underperformance, driven by a deterioration of the general economic conditions in Kazakhstan.

The issue-level and recovery ratings on the unsecured debt take into account the nature of Kazakhtelecom's assets, the probability of a restructuring or going-concern sale, and the likelihood of insolvency proceedings being adversely influenced by Kazakhtelecom being domiciled in Kazakhstan.

Our analysis is based on the current capital structure. However, we believe that additional debt could be raised in a path to default, which could have a negative impact on the recovery outcome.

Our full recovery analysis on Kazakhtelecom will be published shortly on RatingsDirect.