KAZAKHSTAN ELECTRICITY GRID OPERATING COMPANY
Fitch Ratings has affirmed
The Outlook is Stable. A full list of rating actions is provided below.
The affirmation and Stable Outlook reflect Fitch's expectations that funds from operations (FFO) interest cover will remain within Fitch's rating sensitivities in 2022-2025, reflecting the unfavourable interest rate environment, despite low leverage for the rating. The affirmation also considers material FX risk and limited liquidity position. The rating continues to be constrained by weak corporate governance and evolving regulatory framework.
Key Rating Drivers
Low Leverage: Fitch projects FFO leverage to average 2.2x in 2022-2025, which is low for the rating. We also expect healthy FFO, averaging
Low leverage is mitigated by our expectations that the FFO interest cover will deteriorate towards the negative sensitivity of 3.5x by 2025, reflecting the higher interest-rate environment.
Material FX Risk: KUS is exposed to significant FX risk as revenue is generated in Kazakhstani tenge (KZT), while a large share of its debt is in Russian roubles (78% of total debt at
Long-Term Generation Tariffs: Electricity generation tariffs are approved until end-2025, which adds visibility to the company's cash flows. From
Long-Term Distribution Tariffs: Electricity distribution tariffs for
Vertical Integration; Small Scale: KUS's business profile benefits from vertical integration and its strong position in electricity generation, distribution and supply in the highly populated central
The business profile is constrained by KUS's small scale of operations relative to Kazakh peers such as
Weak Corporate Governance: Fitch continues to view KUS's corporate governance as weak, reflecting a non-transparent ownership structure, and sizeable related-party and third-party transactions with limited disclosure and uncertain economic benefit to KUS. As a result, KUS has an ESG Relevance Score of '4' for Governance Structure and '4' for Group Structure.
Derivation Summary
KUS's closest peers are
KUS is rated on a standalone basis. Samruk-Energy is rated three notches below the sovereign under our Government-Related Entities (GRE) Criteria. KEGOC is rated one notch below the sovereign under the GRE Criteria.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Average GDP growth of 3.6% and CPI of 8.6% annually in 2022-2025
Electricity generation and distribution volumes to grow at low single-digit percentages in 2022-2025; flat heat generation volumes over the same period
Electricity generation tariffs to increase below inflation rates in 2023-2025; capacity tariffs to increase to
Electricity distribution tariff growth below inflation rates, as approved by the regulator until 2025
Cost inflation slightly below expected CPI
Capex averaging
Dividend payments of around
No repayment of loans by third parties is assumed over 2022-2025
Cost of new debt at 15%
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increased transparency of the ownership structure and generally stronger corporate governance, with significantly reduced related-party transactions
Improved credit metrics, with FFO gross leverage persistently below 3x and FFO interest coverage above 4.5x
Long-term predictability of the regulatory framework, with less political interference and a stronger operating environment
Improved overall liquidity position with better spread of debt maturities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration of corporate governance (e.g. a significant increase in loans and guarantees to companies outside the company) leading to weaker-than-expected financial performance or aggressive M&A, resulting in FFO gross leverage persistently higher than 4x and FFO interest coverage below 3.5x
Worsening overall liquidity position
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Weak Liquidity: At
Debt mostly comprised secured loans from local banks, which are raised at both holdco and opco level and bonds at MRENC level. The largest creditors are
Issuer Profile
KUS is an integrated utility, with operations in electricity generation, distribution, and supply, across four regions in
Summary of Financial Adjustments
Interest-free short-term loan from related parties for working-capital needs reclassified to debt from other accounts payable.
Cash with restricted use reclassified to restricted cash from other current assets.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Limited Liability Partnership Kazakhstan Utility Systems has an ESG Relevance Score of '4' for Governance Structure and '4' for Group Structure due to non-transparent ownership structure and sizeable related party and third-party transactions. These factors have a negative impact on the credit profile and are relevant to the rating, in conjunction with other rating factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
11
Fitch Assigns Palmer Square European Loan Funding 2022-3 DAC Final Ratings
Wed
Fitch Ratings -
RATING ACTIONS
Entity / Debt
Rating
Palmer Square European Loan Funding 2022-3 DAC
A XS2531943087
LT
AAAsf
New Rating
B XS2531943244
LT
AAsf
New Rating
C XS2531943590
LT
Asf
New Rating
D XS2531943756
LT
BBB+sf
New Rating
E XS2531943913
LT
BBsf
New Rating
Subordinated XS2531944309
LT
NRsf
New Rating
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Transaction Summary
Palmer Square European Loan Funding 2022-3 DAC is an arbitrage cash flow collateralised loan obligation (CLO) that is being serviced by
KEY RATING DRIVERS
'B+/B' Portfolio Credit Quality (Neutral): Fitch places the average credit quality of obligors in the 'B+'/'B' category. The Fitch weighted average rating factor (WARF) of the current portfolio is 22.88.
High Recovery Expectations (Positive): Senior secured obligations make up close to 100% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch weighted average recovery rate of the current portfolio is 65.18%.
Diversified Portfolio Composition (Positive): The largest three industries comprise 36.03% of the portfolio balance, the top 10 obligors represent 10.41% of the portfolio balance and the largest obligor represents 1.25% of the portfolio.
Static Portfolio (Positive): The transaction does not have a reinvestment period and discretionary sales are not permitted. Fitch's analysis is based on the current portfolio and stressed by applying a one-notch reduction to all obligors with a Negative Outlook (floored at 'CCC'), which is 10.64% of the indicative portfolio. After the Negative Outlook adjustment, the WARF of the portfolio would be 23.60.
Deviation from MIR: The class B, D and E notes are rated one notch below their model. The one-notch deviation reflects the limited cushion on the Negative Outlook portfolio at the MIR and uncertain macro-economic conditions that increase end risk.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A 25% increase of the mean default rate (RDR) across all ratings and a 25% decrease of the recovery rate (RRR) across all ratings of the identified portfolio would lead to a downgrade of up to three notches for the rated notes.
Based on the actual portfolio, downgrades may occur if the loss expectation is larger than initially assumed, due to unexpectedly high levels of default and portfolio deterioration. Due to the better WARF of the identified portfolio compared with the Negative Outlook portfolio, the class B,
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A 25% reduction of the mean RDR across all ratings and a 25% increase in the RRR across all ratings of the Fitch's portfolio based on Negative Outlook stress would lead to upgrades of up to four notches for the rated notes, except for the 'AAAsf' rated notes, which are at the highest level on Fitch's scale and cannot be upgraded.
Upgrades may occur in case of a stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread available to cover for losses on the remaining portfolio.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
DATA ADEQUACY
Palmer Square European Loan Funding 2022-3 DAC
The majority of the underlying assets or risk presenting entities have ratings or credit opinions from Fitch and/or other Nationally Recognized Statistical Rating Organizations and/or
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action
Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering Documents for this market sector typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the trust. Therefore, Fitch credit reports for this market sector will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
Additional information is available on www.fitchratings.com
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