Outlook On Kazakh Agrarian Credit Corporation Revised To #BB+/B# Ratings Affirmed

Stocks and Financial Services Press Releases Thursday February 25, 2016 09:13
Standard & Poor's--25 Feb--Standard & Poor's

On Feb. 24, 2016, Standard & Poor's Ratings Services revised its outlook on Kazakh Agrarian Credit Corp. (KACC) to negative from stable. At the same time, we affirmed our 'BB+/B' long- and short-term issuer credit ratings on KACC. We also affirmed the Kazakhstan national scale ratings on KACC at 'kzAA-'. The outlook revision follows the downgrade of Kazakhstan on Feb. 17 (see " Kazakhstan Downgraded To 'BBB-/A-3' On Weaker Growth Outlook And Falling Current Account Receipts; Outlook Negative," published on RatingsDirect).

The ratings on KACC continue to benefit from the potential for extraordinary government support in a stress scenario, which we expect would be provided through the KazAgro Group. The negative outlook on KACC now mirrors that on the sovereign ratings, reflecting that we would likely lower our ratings on KACC if we downgraded Kazakhstan. We expect KACC to remain strategically important to the KazAgro Group: the institution is one of the largest in the group and its primary mandate of channeling government support to the agricultural sector and rural areas remains important to the group's long-term strategy. We understand that KACC's role in direct lending to end-borrowers will gradually diminish with a larger fraction of financing coming through commercial banks, allowing effective utilization of the banks' existing infrastructure and distribution networks.

We currently assess KazAgro group's credit profile (GCP) at 'bbb-', that is, in line with our sovereign ratings as we expect the group to almost certainly benefit from extraordinary government support in case of need. Owing to what we view as KACC's strategically important status within KazAgro Group, our ratings on KACC are three notches higher than its 'b+' stand-alone credit profile (SACP). According to our criteria for rating government-related entities, we also believe that there is a high likelihood of extraordinary government support for KACC in the event of financial distress.

Our view is based on the entity's: Important role for the government. In addition to the aforementioned functions, KACC remains a key provider of cheap loans to non-agricultural businesses in rural areas throughout Kazakhstan. Moreover, its presence in 170 out of 175 districts in Kazakhstan and accumulated expertise in the sector means another entity would not easily be able to replicate its functions; and Very strong link with the government of Kazakhstan, which wholly owns KACC through KazAgro Holding.

We understand that privatization is not currently on the agenda and that the government closely monitors KACC's activities through KazAgro Holding.The negative outlook on KACC mirrors our outlook on the sovereign ratings on Kazakhstan. We would likely revise the outlook or lower the ratings on KACC over the next 12 months if we took similar rating actions on the sovereign. This is because a sovereign downgrade would likely lead us to revise our assessment of KazAgro's GCP, in turn affecting the ratings on KACC. Any weakening in KACC's SACP, which could follow a material deterioration in the credit quality of its loan book and sharply increased credit costs, might prompt us to consider lowering the ratings on KACC. We might consider a positive rating action if we observed an increase in the importance of KACC's role within KazAgro Group. Our view of a stronger probability of extraordinary government support also might lead us to take a positive rating action on KACC, although we do not currently expect this.

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