The Negative Outlook reflects a substantial refinancing risk attributed to the USD350m syndicated loan maturity in July 2010. Fitch expects this loan to be repaid in part with the company’s accumulated cash, whilst the remainder of the outstanding loan is likely to be refinanced with new external debt to be received by Kaztel in the near future. However, Kaztel has yet to secure new external debt. If the company does not successfully secure new debt in the next few months, Kaztel’s ratings are likely to be reviewed for a downgrade.

In addition, the Negative Outlook reflects Fitch’s concern that part of Kaztel’s cash, which is mainly kept in local banks, may be effectively restricted for some period due to the banks’ possible tight liquidity. This could in turn impact Kaztel’s liquidity which was lower than the company’s short-term debt plus the syndicated loan at end-June 2009.

On a negative note, Fitch also underlines that nearly all of Kaztel’s debt is, and will remain denominated in or linked to, foreign currency, whilst the company’s cash flow is denominated predominantly in tenge. This mismatch results in a substantial currency risk. In case of a further tenge devaluation comparable to that in early 2009, Kaztel’s leverage is likely to exceed 2x which could impact the company’s rating.

On a positive note, the ratings factor in Fitch’s expectations of a decline in Kaztel’s leverage and an improvement to generated free cash flow (FCF), following reduced capex, as well as the expected divestment of Kaztel’s 51% stake in its highly-leveraged mobile subsidiary, Mobile Telecom-Service LLP (MTS), which Fitch views as likely at end-2009. At end-2008, Kaztel’s leverage (net debt/EBITDA including associate dividends) was 1.7x, which left the company limited headroom for raising leverage without affecting its rating. Although the 25% tenge devaluation in early 2009 puts substantial pressure on the company’s leverage, Fitch expects leverage will not increase materially or will even decrease by end-2009, due to reduced capex and the planned MTS disposal. For the same reasons, Kaztel’s FCF, which has been negative in 2005-2008, is expected to improve, although remain negative in 2009, and turn positive from 2010.

Kaztel’s ratings continue to be supported by the company’s dominant market position in the fixed-line voice and internet services segments (89% and 67% of the market at end-2008, respectively) in Kazakhstan (’BBB-’/’F3’/Negative Outlook) which is unlikely to be challenged in the short- to medium-term. The ratings are also underpinned by Kaztel’s sustainable EBITDA generation, with an EBITDA margin after associate dividends of 37.4% and an organic EBITDA margin of 30.5% at end-2008. Fitch forecasts that these margins will increase following the MTS disposal.

Kaztel is a fixed-line incumbent operating in Kazakhstan. The state holds an indirect 51% controlling interest in Kaztel through National Welfare Fund Samruk-Kazyna.