Fitch Affirms KazExportAstyk at 'B'/Stable; Unsecured Rating at 'B-'; Off Rating Watch Negative
Fitch Ratings-London/Moscow-10 September 2012: Fitch Ratings has affirmed Kazakhstan-based JSC Holding KazExportAstyk's (KEA) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B' and National Long-term rating at 'BB(kaz)' with a Stable Outlook. Fitch has also affirmed its senior unsecured ratings at 'B-' and National senior unsecured rating at 'B+(kaz)', with a recovery rating of 'RR5' and removed the Rating Watch Negative (RWN) on these ratings.
The affirmation of KEA's IDR at 'B' reflects the agency's expectations of its relatively strong financial performance in FY12 due to favourable selling prices more than offsetting weaker crop yields. This follows two opposing forces potentially affecting KEA's performance in 2012 - a surge in global soft commodity prices (positive) and poor harvest forecasts in Kazakhstan (negative). While H112 financial performance has been stable, this is not representative of the full year outcome as the key harvesting season only finishes in October. Meanwhile KEA has continued to improve its debt profile which resulted in the removal of the RWN attached to its unsecured debt rating.
The IDR continues to reflect the group's moderate to high business risks due to the cyclicality and seasonality of the agricultural commodities sector, its reliance on one geographical area and lack of any large scale vertical integration or diversification beyond crop rotation and ancillary agricultural services.
The affirmation of KEA's unsecured rating reflects the material reduction in its secured debt, currently amounting to less than one-third of total debt by July-August 2012, around the highest seasonal peak in working capital, and hence debt, during the year in contrast to a ca. 50/50 split in the beginning of 2012. Management remains committed to maintain at least the current share of secured debt thus underpinning the expected recoveries available for unsecured creditors in a distress scenario, albeit below-average, after the repayment of secured creditors' claims.
The notch down on the rating for the unsecured notes to 'B-' relative to the IDR of 'B' reflects the still high level of secured facilities in the capital structure that lead to below-average recoveries for unsecured creditors, including the noteholders. Further improvement in the debt structure towards unsecured debt by way of issuing additional domestic bonds to refinance existing bank loans and, generally, fewer secured credit lines, both drawn and undrawn, as well as general de-leveraging, could increase recoveries for unsecured creditors. This could lead to an upgrade in the senior unsecured recovery rating to 'RR4' (this is, however, soft-capped at the IDR level for Kazakhstan issuers due to country-specific treatment of recovery ratings by Fitch).
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Inability to maintain cash on balance sheet plus inventories and available undrawn committed facilities (as a percentage of short-term debt maturities) above 80%.
- Gross leverage (total lease-adjusted debt/EBITDAR) above 4x if combined with negative free cash flow both over a two-year rolling period.
Positive: Although Fitch considers further positive ratings momentum to be limited until at least 2013, any future developments that may, individually or collectively, lead to a positive rating action include a combination of :
- Greater diversification through vertical integration, crop plantings and increased exports as a percentage of sales,
- Gross leverage below 2x (total lease-adjusted debt/EBITDAR) on a sustained basis with interest cover (operating EBITDAR/net interest expense plus rents) above 4x,
- Positive free cash flow after acquisition or dividends for at least two consecutive years
- Full coverage of short-term debt commitments on a forward-looking basis with available liquidity
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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable critera, 'Corporate Rating Methodology' dated 8 August 2012 are available at www.fitchratings.com.
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