Fitch Affirms Central Asia Cement at 'BB-(kaz)'; Withdraws Ratings
September 12, 2013 Fitch Ratings
Fitch Ratings has affirmed Joint-Stock Company Central Asia Cement's (CAC) National Long-Term Rating at 'BB-(kaz)' with Positive Outlook and senior unsecured bond rating at 'B(kaz)'. Fitch has simaltaneously withdrawn the ratings.
CAC has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for CAC.
KEY RATING DRIVERS
Kazakh Market Still Buoyant
The Kazakh cement market continued showing a positive trend in H113, with a growth rate of 11%. Steppe Cement, CAC's ultimate holding company, reduced its market share to 16% from 19%, as the company strategy was to pursue higher selling prices than volumes. Steppe Cement's selling price increased +15%yoy, allowing revenue to rise by 6%, despite a decline in volumes.
Solid Market Positioning
Steppe Cement has a leading position in the Kazakh cement market, with a share of 20%, and a cost advantage over its competitors, thanks to the favourable location of its Karaganda plant, which has been partially renovated to efficient dry technology. The rating also reflects the healthy long-term prospects for cement demand in Kazakhstan, backed by solid GDP growth, strong potential for residential demand, and by the upgrading of infrastructure.
High Operational Risk
Despite the improvement in financials, Steppe Cement's ratings are constrained by the high operational risk, as the group is present exclusively in the Kazakh cement market, which has been extremely volatile in terms of both volumes and prices in recent years. The potential realisation of additional capacity from a number of competitors could cause a demand/supply imbalance in the next few years, which could put pressure on cement prices and on industry margins. Moreover, Steppe Cement operates a single cement production plant, increasing operational risk. Lastly, the completion of Line 5 projects is still subject to execution risk.
Solid Financial Structure
Following Steppe Cement's GBP10m (USD16m) capital increase completed in December 2012 and CAC's KZT1.5bn (USD9.5m) unsecured bond issue completed in November, the group has raised most of the USD30m needed to complete its Line 5 refurbishment project and improved its financial structure. Funds from operations (FFO) net leverage declined to 1.5x at end-2012 (from 2.6x at end-2011), and Fitch expects gross leverage to improve from 2013, when Steppe Cement will repay part of its long-term bank facilities, falling below 2.0x.
High Secured Debt
The rating of CAC's unsecured bond reflects its subordination to all the other bank facilities of Steppe Cement and the fact that all the major group's assets are pledged. Long-term facilities from HSBC and EBRD are secured against the Karaganda cement plant (the only group's plant) while RCF from local banks are secured against commercial receivables and inventories, thus reducing the recovery expectation for unsecured creditors in case of default.
Steppe Cement Consolidated
Fitch rates CAC on the basis of Steppe Cement Limited's credit profile and consolidated figures. Fitch considered this to be the most meaningful economic entity in view of both the strong operational ties between Steppe Cement, and its 100% controlled subsidiaries CAC and Karcement, and the cross guarantees on their respective debts.
Company — Central Asia Cement
Full nameAO Central Asia Cement
IndustryChemical and petrochemical industry