TEXT-S&P release on Kazanorgsintez OJSC

(The following statement was released by the ratings agency)

Aug 19 - Standard & Poor's Ratings Services said today that it had removed its long-term 'B-' corporate credit and 'ruBBB' Russia national scale ratings on Kazanorgsintez OJSC (KZOS.RTS) from CreditWatch, where they had been placed with negative implications on May 2, 2008. At the same time, the ratings were affirmed. The outlook is now stable.

"The removal from CreditWatch and affirmation reflect that the group has successfully obtained a waiver for its incurrence covenant (leverage), as well as having covenants waived for other bank lines," said Standard & Poor's credit analyst Lucas Sevenin. "Furthermore, we expect the group to be able to obtain further new bank lines in the short term, to meet continued capital expenditures."

The group's high leverage and weak cash flow metrics reflect substantial, debt-funded expansion capital expenditures and the group's aggressive financial policy. The petrochemical industry's cyclical profits and corporate governance uncertainties also constrain the ratings. Risks of supply disruption and the unfavorable tolling agreement with OAO Gazprom (GAZP.MM) (BBB/Stable/--) also pressure the ratings.

However, Kazanorgsintez has historically had a comfortable EBITDA margin, averaging 25% over the past four years, thanks to cheap feedstock, favorable cycles, good market shares for the group's main products, and fast-growing demand for polyethylenes in Russia (helped by low penetration rates). These factors help mitigate the ratings pressure.

"We expect the group to generate a solid EBITDA margin of at least 20% in 2008 and finance its maturing debt, capital expenditures, and working-capital needs with bank credit lines that are already signed or approved by the banks," said Mr. Sevenin.

The outlook could be revised to negative if we see signs of materially weakening profit in 2009, or if Kazanorgsintez's liquidity becomes tight, which could happen if, for example, the group faces substantial production or feedstock supply issues.

Given the high leverage and limited capabilities for free operating cash flow, rating upside is unlikely in the short to medium term.