S&P affirms long-term credit rating of KazTransOil at ВВ , outlook negative
The affirmation reflects our view that KTO continues to enjoy a "high"
likelihood of timely and sufficient extraordinary government support from the
government of Kazakhstan as well as our assessment of KTO's stand-alone credit
profile (SACP) at 'bb+' . We also continue to see KTO as a "strategically
important" subsidiary of the KMG group.
KTO's "strategically important" status within the KMG group and its importance
to the government of Kazakhstan are underpinned, in our view, by the company's
role as the main oil pipeline network operator in the country, transporting more
than 53% of oil volumes in the country. We consider KTO's role for the
government to be "very important" and the link between the company and the
government to be "strong," albeit indirect. We also assume that extraordinary
state support would likely come directly from the government, rather than
through the parent, therefore we determine the corporate credit rating on KTO
based on its stand-alone credit profile (SACP) plus uplift for potential
government support. At the moment there is zero uplift from the SACP, since the
SACP is 'bb+' and, in accordance with our group rating methodology, the rating
on KTO is capped by the rating on its parent, KMG (BB+/Negative/--).
We derive the SACP on KTO from our assessment of its "fair" business risk
profile, "modest" financial risk profile, as well as our application of a
"negative" financial policy modifier.
KTO has a solid market position and limited competition from rail and tanker
transport, owing to Kazakhstan's land-locked location, geographic isolation from
the Caspian Sea, and the low cost of pipeline transportation. However, we
assess country risk in Kazakhstan as "high," and we consider tariff regulation
to be opaque and irregularly revised.
The KTO group has a favorable debt structure, in our view, given that all of its
outstanding debt is currently at the level of the operating subsidiaries and
joint ventures. KTO also enjoys good financial flexibility, thanks to its
adequate cash position, flexibility to defer most of its new projects, and
available borrowing capacity. In 2015, we expect KTO to continue generating
strongly positive free operating cash flow (FOCF) on the back of the tariff
increases that took place in 2014. We think that KTO's sizable accumulated cash
balances cover all existing investment projects and allow for high dividend
payouts. The company's main weaknesses include its potential involvement in new
construction projects, which might result in weakened credit metrics and a more
aggressive financial risk profile, and its exposure to potential dividend
pressure from the parent.
The negative outlook reflects that on the parent, KMG. In accordance with our
group rating methodology, the rating on KTO is capped by the rating on KMG,
and if we lowered the rating on the parent by one notch, that most likely would
lead to a similar rating action on KTO.
We also could lower the rating if KTO were to undertake new investment projects
requiring significant external borrowing, resulting in weakened credit measures,
or if we were to see substantial unfavorable changes in new contracts with
customers. However, we note that if the local currency sovereign rating on
Kazakhstan stays at 'BBB', the rating on KMG remains at 'BB+', and our views of
KTO's likelihood of state support and group status are unchanged, we would
have to revise the SACP of KTO down as low as 'b+' to trigger a downgrade.
That might stem from a substantial increase in leverage on the back of heavy
investments or dividends, taking the financial risk profile to the "aggressive"
category (with debt to EBITDA exceeding 4x, for instance), or a significant
deterioration in liquidity. We currently view these scenarios as very unlikely
though.
Indications of weaker support or negative interference from the parent or the
state could also put pressure on the rating. The rating on KTO does not
currently benefit from any uplift for government support because KTO's SACP is
'bb+', so any downgrade following such negative interference would be the
result of weaker credit metrics.
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