S&P downgrades credit ratings of Natiobal managing holding KazAgro to level "ВВВ-/А-3"; outlook "Negative"

/Standard & Poor's, London, July 10, 15, heading by KASE/ – Standard & Poor's Ratings Services said today that it lowered its long- and short-term foreign and local currency issuer credit ratings on Kazakhstan's KazAgro National Management Holding (KazAgro, or the holding company) to 'BBB-/A-3' from 'BBB/A-2'. We also lowered the Kazakhstan national scale rating on KazAgro to 'kzAA' from kzAA+'. We removed the ratings from CreditWatch, where they were placed with negative implications on July 1, 2015. The outlook is negative. The downgrade primarily reflects our assessment of the somewhat reduced likelihood of the Kazakhstan government extending timely and extraordinary support to KazAgro National Management Holding (KazAgro, or the holding company), if needed, against a background of a weaker economic outlook and fiscal revenue pressures. KazAgro is the 100% government-owned holding company of KazAgro Group (the group). While we believe that the group--the main operating companies of which are Food Contract Corporation, KazAgroFinance, and Agrarian Credit Corp. (KACC)--continues to play a critical role for the government, we have revised down our assessment of the holding company's role to very important from critical. Accordingly, we now consider that there is an extremely high likelihood that the government of Kazakhstan would provide timely and extraordinary support to KazAgro, if needed. The negative outlook mirrors that on the sovereign and indicates that we would lower the ratings on KazAgro if we were to downgrade Kazakhstan. We rate KazAgro under our criteria, "Group Rating Methodology" and "Rating Government-Related Entities: Methodology And Assumptions". In our view, Kazakhstan's fiscal revenue pressures--primarily stemming from the pronounced decline in oil prices over the last year--may reduce the likelihood that the government would provide timely and extraordinary support to some quasi-fiscal institutions and government-related entities (GREs). By "extraordinary" we mean support to ensure the full and timely servicing of debt in a stress scenario. We do not view as extraordinary support government transfers that aim to expand or continue an institution's activities, such as government spending programs channeled through GREs. The group and its parent company KazAgro (the holding company) were established in 2007 by presidential decree. The shares of seven 100% government-owned institutions operating in the agricultural sector were transferred to the holding company shortly after its creation. The subsidiaries broadly focus on providing lending and financial support to the socially important agricultural sector (which employs around 45% of the population of Kazakhstan) and include the Food Contract Corporation, a vehicle through which the government can intervene in the grain market. We assess the likelihood of extraordinary government support to the consolidated group as almost certain. This is based on our view of the group's: - Integral link with the government. The state owns 100% of the holding company, which in turn fully owns its subsidiaries. We do not currently expect the ownership structure to change. The holding company has a special status as a financial agency, which confers certain benefits including the ability to borrow from the state without collateral. Previously, the government has provided support to the group. For instance, the government made a Kazakhstani tenge (KZT) 20 billion equity injection into the holding company following the tenge devaluation in February 2014. Several ministers and the first deputy prime minister are on the holding company's board of directors; - Critical public policy role as the government's primary vehicle for providing financial support to and developing the agricultural sector and rural areas. KazAgro's subsidiaries support the agricultural sector through leasing, providing short- and long-term lending, extending micro-financing, and intervening in the grain market. We view the group as key to implementing several government strategies, including AgroBusiness 2020. According to management's estimates, the group's current share in total lending to the agricultural sector is close to 50%.. Consequently, the group credit profile (GCP) is 'bbb', which aligns with the sovereign credit rating on Kazakhstan. The GCP reflects the creditworthiness of the consolidated operations group and takes into account extraordinary government support. We believe, however, that while the holding company's creditworthiness is closely tied to that of the consolidated group, it is marginally weaker than the group's. This results in a one-notch difference between our rating on KazAgro and our assessment of the GCP. The difference primarily stems from our assessment of the role the holding company has for the government. The difference also reflects the holding company's nonoperating status--that is, KazAgro's primary function lies in managing its subsidiaries. In our view, the group's importance to the government largely stems from the importance of its subsidiaries rather than that of the holding company. We therefore assess the holding company's role for the government as very important--that is, lower than the group's critical role. Our assessment reflects the holding company's function of optimizing the operational efficiency of its subsidiaries as well as removing any potential competition between them. It also reflects the holding company's importance in coordinating the government's policies in the agricultural sector under several strategic state programs. We consider that there is some reputational risk for the government from not supporting the holding company in a stress scenario. However, given the current macroeconomic and fiscal settings in Kazakhstan, we do not believe this potential risk is high enough for us to assess the holding company's role as critical. In particular, we believe that the default of the holding company would not necessarily have a critical impact on the government as the subsidiaries undertaking operating activities would not likely automatically be in default, and would be able to keep carrying out their business. We also believe that if financial stress emerged at the subsidiary and holding company levels simultaneously, the government might choose to rescue the subsidiary first. In our view, depending on the severity of such a scenario, the government could consider changing the ownership structure of the group's entities to avoid extra fiscal costs. The provision of direct support to subsidiaries or a change in the ownership structure could, in turn, require legislative changes. Our unsupported group credit profile (unsupported GCP), which reflects the creditworthiness of the consolidated group without taking into account the potential for extraordinary government support, is unchanged at 'b+'. Our assessment of the group's capitalization as strong remains the main stand- alone rating strength. It reflects the group's relatively low leverage ratios, supported by regular capital injections from the government. We expect debt to adjusted total equity to be about 2.0x-2.2x in 2015-2017, up from 1.6x at the end of 2014. The group's funding remains moderate, reflecting significant foreign currency risks inherent in its funding profile. In particular, the group's short open currency position has increased to KZT223 billion or 63% of adjusted total equity (ATE), up from 30% of ATE a year ago. That said, we also anticipate the government would compensate the group in case of future currency losses, which we see as an offsetting factor. We expect the group will continue maintaining adequate liquidity buffers. Its broad liquid assets covered short-term wholesale funding by 1.7x at the end of 2014, which compares well to peers. In line with our expectations, the liquid assets decreased to 19% of the balance sheet on Dec. 31, 2014, from 49% a ear earlier because KazAgro placed the funds from its Eurobond issuance into long-term loans to banks to facilitate the restructuring of old loans to customers in the agricultural sector. This was done in accordance with Kazakhstan's Agrobusiness 2020 strategy. The negative outlook mirrors that on the sovereign. We would likely revise the outlook, raise or lower the ratings on KazAgro, if we took similar actions on the sovereign. We currently consider the likelihood of the ratings on KazAgro being further lowered independently from the sovereign ratings to be low. This could, however, occur if we saw signs of waning government support to the group. We could also lower the ratings if we perceived the role of KazAgro for the government as reducing in contrast to the role of the overall group. We could consider an upgrade if we perceived that the holding company's role for the government and its relative importance within the group had increased. Additional contact: International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com [2015-07-15]