OREANDA-NEWS. Fitch Ratings says that National Company KazMunayGas's (NC KMG, BBB/Stable) Fitch-calculated gross adjusted debt at end-2015 is likely to exceed the agency's guidance for downgrade on sharply lower Brent, weak financial performance, the 2H15 tenge depreciation and other factors. We estimate that at 31 December 2015, NC KMG's funds from operations (FFO) adjusted gross leverage could have exceeded 10x. However, we expect it to moderate in 2016 as NC KMG realises the full benefit of the weak tenge in its cash flow statement. We continue rating NC KMG one notch below Kazakhstan (BBB+/Stable) based on our expectation that the sovereign will provide sufficient and timely tangible support to the group.

In mid-2015, NC KMG launched a debt reduction programme to address rising leverage and comply with the Eurobond incurrence and bank loan maintenance covenants. By end-2015, NC KMG had completed an early partial repayment of Eurobonds with an aggregate nominal value of USD3.7bn, early repayment of a USD400m syndicated loan and a USD670m external debt reduction by KazTransGas JSC (KTG, BBB-/Stable), its key midstream subsidiary. NC KMG's consolidated gross debt could decrease further in 2016. In March 2016, Intergas Central Asia (ICA, BBB-/Stable), KTG's subsidiary, announced that it was aiming to repay up to USD150m of its outstanding USD270m Eurobond by end-1Q16, by drawing on a short-term credit line.

NC KMG relies on support from its intermediary parent, Sovereign Wealth Fund Samruk-Kazyna (SK, BBB+/Stable). In 2015, SK agreed to acquire from NC KMG a 50% interest in KMG Kashagan BV for USD4.7bn, raising USD2.7bn from the National Bank of Kazakhstan (NBR) and the rest from commercial banks. We understand that by 31 December 2015 NC KMG had received most of this cash from SK and estimate that NC KMG was in compliance with the 3.5x net debt (including guarantees) to EBITDA covenant.

Despite the undertaken steps, we estimate that at 31 December 2015 NC KMG's FFO adjusted gross leverage could have exceeded 10x (end-2014: 6.3x), primarily due to the weak performance of KMG EP, its key upstream subsidiary, significantly lower dividends from NC KMG's JVs and a weaker tenge. Fitch analyses NC KMG's debt on a gross basis as the company has historically relied on debt financing for capex funding.

We believe that up to USD3bn in prepayments agreed with Vitol SA for NC KMG's 20% share in oil from the Tengizchevroil (TCO) JV will be neutral for NC KMG's gross leverage as long as the company uses cash to pay down its borrowings. We are likely to treat the prepayments as debt. Other potential funding sources in 2016 may include the remaining cash from the sale of the interest in KMG Kashagan BV and proceeds from the planned sale of a stake in KMG International (B+/RWN).

Although we view the transaction with SK with respect to KMG Kashagan BV as evidence of tangible state support that we already incorporate into NC KMG's ratings, we expect NC KMG to improve its standalone financial profile to a level commensurate with the mid 'BB' rating category for an oil & gas company, e.g. FFO adjusted gross leverage of 3.8x and fixed charge cover ratio of 6x, over the medium term in order to maintain its ratings.