Fitch Revises Outlook on KazAgro to Negative, Affirms at 'BBB'
OREANDA-NEWS. Fitch Ratings has revised Kazakhstan-based KazAgro National Managing Holding JSC's (KazAgro) Outlook to Negative from Stable and affirmed its Long-term foreign currency Issuer Default Rating (IDR) at 'BBB' and Long-term local currency IDR at 'BBB+'. The agency has also affirmed KazAgro's Short-term foreign currency IDR at 'F3', senior unsecured eurobonds at 'BBB' and domestic bonds at 'BBB+'.
The revision of the Outlook to Negative is driven by the weakening of KazAgro's financial profile in 2015, which has not been fully compensated by the state. This increases the probability that Fitch will reassess KazAgro's financial integration with Kazakhstan to weaker from midrange.
The affirmation of the IDRs and senior debt ratings reflects KazAgro's unchanged special legal status, its strategic importance for state policy on agriculture support and strict state control over the company.
Fitch uses its public sector entities methodology in its analysis of KazAgro. We consider it a credit-linked entity and have applied a one-notch rating differential from Kazakhstan's ratings (BBB+/A-/Stable). Fitch rates KazAgro as a standalone entity and does not factor in the group's consolidated financial results and obligations.
KEY RATING DRIVERS
Fitch no longer expects KazAgro to maintain state-originated funding at a majority share of more than 50% over the medium term. In 2015, state-originated long-term funding dropped to 48% from 56% in 2014 on a standalone basis.
The increased proportion of market funding in 2015 resulted from exacerbation of forex risk on its external debt due to considerable tenge devaluation, brought by abandoning currency peg to US dollar in favour of a free-floating exchange rate in August 2015. To mitigate this policy shift, the state provided KazAgro with additional funding of KZT104bn (bonds issued in favour of Pension Fund), along with an extension of maturities on previously issued domestic bonds in 2009. Nevertheless the state support was not sufficient to counter the negative effect of local currency devaluation on KazAgro's funding structure and financials.
In Fitch's view, KazaAgro's mandate as a government quasi-fiscal agent implementing the state's agricultural policy will remain intact in the medium term. Agriculture remains strategically important to the state. It contributed 4.3% to the nation's gross domestic product in 2014 and employed about 21% of the country's labour force.
Fitch considers KazAgro's legal status as strong. The company can only be renamed, reorganised or dissolved by a presidential decree. KazAgro is a national management holding, 100% owned by Kazakhstan. The group includes Food Contract Corporation, KazAgroProduct, KazAgroFinance (BBB-/Stable), Agrarian Credit Corporation, Fund for Financial Support of Agriculture, KazAgroGarant and KazAgroMarketing. Although four of its subsidiaries were listed in a privatisation plan, reviewed in December 2015, we expect KazAgro to maintain its legal status over the medium term
Fitch views the government's control and oversight over KazAgro's operations as strong. The company's board comprises key national ministers as well as independent directors and is chaired by the republic's First Deputy Prime Minister. The state mandates KazAgro's key policies on debt, dividends and investments, appoints its audit committee and external auditor, monitors and controls the use of government funds allocated to the entity.
A downgrade would follow the materialisation of diminishing propensity for support from the state as measured by sustainable shift in long-term funding structure in favour of market instruments, leading to widening of a ratings differential with the sovereign to two notches. Negative rating action on the Republic of Kazakhstan would also be reflected by KazAgro's rating.