Fitch Ratings-Moscow/Milan/London-23 November 2015: Fitch Ratings has upgraded Kazakhstan Mortgage Company's (KMC) Long-term foreign currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-' and Long-term local currency IDR to 'BBB+' from 'BBB'. The Short-term foreign currency IDR has been affirmed at 'F3'. The Outlooks on the Long-term ratings are Stable.
Fitch has also upgraded the Long-term local currency rating on KMC's outstanding senior debt to 'BBB+' from 'BBB' and the Long-term local currency rating on the outstanding subordinated bonds to 'BBB' from 'BBB-'.
The upgrade reflects KMC's strengthened strategic importance following its appointment as the priority provider of social rental housing under the state's Programme for Regions' Development until 2020 and extended government support. Consequently, Fitch has narrowed the notching from the republic of Kazakhstan (BBB+/Stable/F2) to one from two.
KEY RATING DRIVERS
KMC's ratings reflect the company's ultimate ownership by the government, its high strategic importance in social housing and strong control and oversight by the state. However, the ratings also factor in moderate integration with the state as its financial flows and debt stock are not consolidated in any government bodies.
Fitch uses its public-sector entities rating criteria and considers KMC a credit-linked entity. Fitch views Kazakhstan as the ultimate sponsor of KMC as the company's shares are held by the National Managing Holding Company Baiterek (BBB+/Stable/F2), which is 100%-owned by the state.
KMC's role in the state housing policy has grown in 2015 when the company was selected as the prioritised participant of Kazakhstan's Programme for Regions' Development to 2020. Under this programme, KMC is required to deliver about 1.5 million sq.m. of social rental housing across the republic until 2020. To implement this programme KMC has received KZT92.5bn of subsidised loans from Baiterek in 2015 to be invested in social rental housing. This resulted in an increase of accumulated direct funding from state-owned institutions to about KZT160bn by 9M15 from KZT67bn at end-2014.
Funding was sourced from the National Fund of Kazakhstan in the form of a 30-year subsidised loan with a 0.15% annual interest. Fitch expects the government to continue to provide financing, in varying forms, to the state housing programme during 2016-2019. The President of the Republic has approved the allocation of an additional KZT52.5bn funding from the National Fund of Kazakhstan in 2016.
KMC also receives indirect support from state-owned institutions. At 1 September 2015, 78% (end-2014: 78%) of KMC's KZT90bn outstanding domestic bonds were held by state-owned institutions such as the Integrated Accumulative Pension Fund, Development Bank of Kazakhstan (BBB/Stable/F3) and House Construction Savings Bank of Kazakhstan (BBB+/Stable/F2). This underpins Fitch's view that KMC would be eligible for government support in case of need.
KMC continues to operate under strong control and oversight from the central government. KMC's Board of Directors is controlled by the head of Baiterek, whose Board of Directors is chaired by Prime Minister of Kazakhstan. Baiterek approves KMC's annual budgets, borrowing decisions, investments and dividend policy. The company is monitored by various state auditors and controllers for the use of funds allocated from the state budget and the National Fund of Kazakhstan.
Fitch views KMC's integration into the general government sector as moderate. The company has a separate budget and its debt is not consolidated in state debt. However, KMC relies heavily on funding received from the government and state-owned institutions in the form of equity injections, subsidised loans and financing through bond issues.
An upgrade may result from an upgrade of the sovereign ratings provided that KMC's links to the government are unchanged, or from tighter integration with the sovereign, including an explicit government guarantee.
Changes to the legal status leading to a dilution of control or weakening of support by the sovereign could lead Fitch to widen the notching from the sovereign to two notches, resulting in a downgrade. A negative rating action on the Republic of Kazakhstan would also be reflected in KMC's ratings.
Source: Fitch Ratings