December 28, 2017 / 2:22 PM / a year ago

Fitch Rates Kazakhstan's Real Estate Fund Samruk-Kazyna 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, December 28 (Fitch) Fitch Ratings has assigned Kazakhstan's Real Estate Fund Samruk-Kazyna (REFSK) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BB+' and a National Long-Term Rating of 'AA(kaz)'. The Outlooks are Stable. Fitch has also assigned REFSK a Short-Term Foreign Currency IDR of 'B'. The ratings are based on Fitch's view of REFSK as a government-related entity (GRE) under the agency's exposure draft "Government-Related Entities Rating Criteria" and reflect the entity's linkage with the Republic of Kazakhstan (BBB/Stable/F2), which is the ultimate sponsor of the company. KEY RATING DRIVERS Tight links with the state are reflected in the ultimate 100% ownership of REFSK by the Kazakhstan government, its status as a state agent in the provision of affordable housing with funding from the government, as well as in the strong control and oversight by the state. The two-notch rating differential factors in the moderate financial impact on the government of REFSK's default and the existence of few other state-mandated companies in the sector, which could impact the timeliness of emergency support to REFSK in case of need. Status, Ownership and Control Assessed as Strong REFSK is authorised to implement the state housing policy but operates under the general legal regime. REFSK is a joint-stock company indirectly owned by the government via the fully state-owned National Wealth Fund Samruk-Kazyna (BBB/Stable/F2). Operating and financing activities are controlled by the government and REFSK coordinates its operations with National Wealth Fund Samruk-Kazyna, Ministry on Investment and Development and The National Bank of Kazakhstan. Fitch does not expect any changes to REFSK's legal status, control and ownership over the medium term. Support Track Record Assessed as Very Strong REFSK relies entirely on state funding with no exposure to market debt. As the operator of several state programmes, it has been receiving continuous financial support since its inception in 2009 in the form of 100% charter capital (KZT19.9 billion) and subsidised loans from the state via its parent company. As of end-2017 total accumulated state funding accounted for KZT172.6 billion and an additional KZT34.3 billion is budgeted for 2018. Debt repayment extends till 2032 and the loans carry subsidised interest rates of 0.15% to 2%. The consistent state support underpins REFSK's adequate financial profile. Socio-Political Implications of Default assessed as Strong Fitch views REFSK as strategically important to the state due to its key role in providing housing affordability. According to Kazakhstan's state programme of housing development, Nurly Zher, REFSK continues to be a government-appointed operator in the development of rental and affordable housing in the republic, fully funded by the state. REFSK is designated to deliver 608 thousand sq. m of rental housing and 320 thousand sq. m of affordable housing across the country by 2020 and will manage its rental housing portfolio until 2032 when it is completely bought out by tenants. The provision of affordable housing is a high priority for the Kazakhstan government, as evident from the ongoing evolution of the state housing programme and continuous state funding amid high demand from the population. This means financial distress of REFSK would jeopardise the implementation of the state housing programme, leading to serious socio-political implications, in Fitch's view. Financial Implications of Default assessed as Moderate REFSK has a separate budget and its debt is not consolidated in the general government's accounts. As it is not a participant in debt capital markets default risk on market debt is negligible. In Fitch's view the share of market debt exposure should remain low over the medium term. But should the state's or REFSK's policy change, Fitch would reassess the financial implication of default. Low-Cost Funding Supports Profitability The company has been profitable for the last five years. In 2016, the REFSK recorded a net profit of KZT4 billion, up from an average KZT2 billion in 2012-2015, following its appointment as the agent in the state housing programme. The improved performance was supported by increased turnover after REFSK received about KZT114 billion low-cost loans from the parent company in 2016-2017. REFSK expects to remain profitable over the medium term, in line with its historical performance. Earmarked Long-term State Funding Fitch expects REFSK's debt to moderately increase and peak at KZT183.6 billion at end-2018. Under its debt policy, the company fully relies on long-term state funding, which is sourced from the National Fund of the Republic of Kazakhstan and channelled through Samruk Kazyna. Funding in turn is invested to private developers for the construction of affordable housing and rental properties. RATING SENSITIVITIES An upgrade may accompany a similar action on the sovereign ratings, provided that REFSK's links to the government are unchanged, or from tighter integration with the sovereign. Changes to REFSK's status, leading to weakening of support by the sovereign could lead Fitch to widen the notching, resulting in a downgrade. Negative rating action on the Republic of Kazakhstan would also be reflected in REFSK's ratings. Contact: Primary Analyst Vladimir Redkin Senior Director +7 495 956 2405 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Elena Ozhegova Director +7 495 956 2406 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Exposure Draft: Government-Related Entities Rating Criteria (pub. 27 Nov 2017) here International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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