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The International Rating Agency Fitch Ratings has downgraded Kazakhstan Electricity Grid Operating Company's (KEGOC) Long-Term Foreign Currency Issuer Default Rating to 'BBB-' from 'BBB', the rating agency reported. The Outlook is Stable.

“The downgrade reflects weakened legal ties between KEGOC and its sole, indirect shareholder - the Republic of Kazakhstan (BBB/Stable), following a decline in the share of state-guaranteed debt below our 40 percent threshold,” Fitch said.

Following the downgrade, the company's Long-Term IDRs are one notch lower than the sovereign's, according to the rating agency.

“KEGOC's ratings continue to reflect overall strong links with the government and we expect timely support in case of need, including should financial covenants need to be waived or renegotiated,” Fitch said.

The rating agency continues to view the operational and strategic links between KEGOC and the state as strong, which supports the application of the top-down rating approach. The strength of the ties is underpinned by the company's strategic importance to the Kazakh economy as it is 90 percent+1 controlled by the state. Other factors supporting the links are the status of KEGOC as the national electricity transmission grid operator, strong operational ties, including tariff and capex approval, and track record of state support in the form of equity injections, contributions of assets, subordinated loans and subsidies.

Fitch noted that KEGOC continues to benefit from favourable long-term tariffs set by the Committee on Regulation of Natural Monopolies and Protection of Competition until 2020. In Fitch’s view long-term tariffs provide earnings visibility, although they remain subject to revision in case of macroeconomic shock or tenge devaluation. In its rating case, Fitch forecasts tariffs to grow on average 2 percent below approved levels over 2017-2020.

KEGOC's capex programme of 236 billion tenges for 2016-2020 remains high, although it was scaled down in September 2016 from 268 billion tenges previously with the postponement of some development projects. Fitch does not expect substantial reductions to capex since approved high tariff growth is contingent on certain investments being realised. Fitch also expects KEGOC to rely on new unguaranteed borrowings to finance its large capex programme.
Fitch noted that the company's financial profile significantly improved in 2015, and the rating agency expects its funds from operations (FFO) adjusted leverage and FFO fixed charge cover to average 2.5x and 6.9x in 2016-2020, respectively.

Fitch's key assumptions within the rating case for KEGOC include: tariff growth of 2 percent below the approved long-term tariffs; transmission volumes to grow in line with GDP over 2016-2020; 236 billion tengesof total capex in 2016-2020; 80 percent dividend pay-out ratio in 2017-2020, which is higher than the company's forecast of 40 percent; interest rate for local bonds at 13.4 percent in 2017, 12.4 percent in 2018 and 10.4 percent in 2019-2020.
Positive sovereign rating action; strengthening of legal ties (e.g. the share of guaranteed debt rises steadily above 40 percent); and enhancement of the business or financial profile, possibly as a result of stronger regulation and higher equity funding, which would be positive for the unguaranteed debt profile of KEGOC and its standalone rating may, individually or collectively, lead to positive rating action.

Negative sovereign rating action; and if the state tolerates deterioration of the company's credit profile e.g. through increased capex programme without sufficient funding or downward revision of tariffs, leading to FFO adjusted gross leverage persistently higher than 4x and FFO fixed charge coverage below 4x, may, individually or collectively, lead to negative rating action.

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