(The following statement was released by the rating agency)
July 16 - Fitch Ratings has assigned Kazakhstan Mortgage Company (KMC) a Long-term foreign currency rating of ‘BB’ and Long-term local currency rating of ‘BB+', and a Short-term foreign currency rating of ‘B’. The Outlooks for the Long-term ratings are Positive. The rating action also affected the outstanding bonds of the company.
KMC’s ratings reflect the company’s ownership by the government, its strategic importance in the area of social housing and hence potential government support. Fitch uses its public-sector entities rating criteria and applies a top-down approach in its analysis of KMC. The Positive Outlooks reflect the sovereign rating and expected capital injection from the state.
Fitch notes that the resumption of explicit government support in the form of capital injections leading to improvement of company’s financial position and profitability could be positive for the ratings. Conversely, a weakening or absence of state support visible primarily in a delay or lack of the planned state recapitalisation of KMC would lead to Fitch to change its approach to the rating to a standalone basis (from the top down), which could result in a multiple-notch downgrade.
KMC acts as the government’s agent in the area of affordable housing provision and plays a crucial role in implementing government social housing programmes for low and middle income households. Additionally, KMC contributes to the stability and development of Kazakhstan’s financial sector through refinancing mortgage loans of commercial banks, securitisation of mortgages and by issuing bonds.
The costs of KMC’s financing have increased considerably since 2008 due to distress in the financial markets. The company’s average annual effective financing cost exceeded 11% in 2011, which outran the average yield on KMC’s mortgage loan portfolio of 9%. This led to negative net interest income and KZT6.2bn losses in 2011. Fitch expects that budgeted capital injections from the government will decrease financing costs and gradually revive KMC’s profitability in the medium term.
KMC’s absolute debt level has been relatively stable over the past five years. However, the leverage (debt to equity ratio) weakened to 5x in 2011 from 2.5x in 2008 due to equity erosion caused by lack of capital injection from the state and weak profitability. The bulk of KMC’s debt is in floating-rate domestic bonds, which accounted for 70% of its liabilities by end 2011. In addition, KMC is exposed to unhedged forex and derivative risk in the form of a USD100m bank loan. The company also has a long-term subsidised loan from the government.
KMC has a sound liquidity cushion: the company’s cash and deposits at end-2011 totalled KZT14bn, which is 2x higher the debt due in 2012. This significantly mitigates refinancing risk and Fitch notes that urgent support from the government is unlikely to be required by KMC in the near term. In general, KMC has a relatively long-term debt maturity profile spread out until 2027 with domestic bond repayment concentrated in 2012 to 2018.
KMC expects to receive KZT107.8bn of capital injections as part of an approved state programme ‘Affordable housing 2020’ over the period of 2013-2020. The government is also expected to provide explicit guarantees for KMC’s domestic bonds in the amount of KZT56.5bn. This will strongly improve the company’s equity and will positively influence its profitability. The company received capital injections during 2000-2007 upon establishment and as part of the state programme ‘Affordable housing 2005-2007’.
A credit analysis on KMC will shortly be available at www.fitchratings.com.