Tashkent, Uzbekistan (UzDaily.com) -- Standard & Poor’s Ratings Services (S&P) said on 16 September that it had lowered its long-term issuer credit and Kazakhstan national scale ratings on Mortgage Guarantee Fund of Kazakhstan (JSC) (MGFK), a specific type of mortgage insurance provider 100% owned by the Republic of Kazakhstan (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A-3; Kazakhstan national scale ’kzAAA’) to ’BB-’ and ’kzA-’ from ’BB’ and ’kzA’. The outlook is stable.

At the same time, the ratings were removed from CreditWatch, where they had been placed with negative implications on 16 June 2009. Before the CreditWatch placement, the outlook was stable.

"The downgrade and removal from CreditWatch follow our application of our revised methodology for rating government-related entities," said Standard & Poor’s credit analyst Boris Kopeykin.

The ratings reflect S&P expectations of a "moderately high" likelihood of timely and sufficient extraordinary support to MGFK from the Kazakh government in case of financial distress.

The ratings also incorporate MGFK’s weak stand-alone credit profile, which S&P assesses at ’B’. This opinion is based on the company’s short track record, weak and volatile financial position, and limited scale of operations, although it has a lack of debt and a commitment to a policy of "no debt".

In accordance with S&P criteria for government-related entities, the view of a "moderately high" likelihood of extraordinary government support is based on assessment of MGFK’s:

• "Limited importance" for the government. This is because the company is small and has just over Kazakhstani tenge (KZT) 4 billion in capital (US$28 million). The company has a relatively narrow public policy mandate. MGFK is a specific type of mortgage insurance provider, the main role of which is to provide guarantees on loans provided under the state-sponsored mortgage program. MGFK is involved in several state-sponsored housing program and has participated in about 60% of apartment purchases concluded as part of these programs, guaranteeing about KZT50 billion. But in total its guarantees cover only about 7.5% of all mortgages issued in Kazakhstan. S&P view on MGFK’s "limited" role also incorporates the past track record of support to MGFK in the form of recurring capital injections, with the most recent one provided in 2007. S&P expects the company to be involved in future government-sponsored mortgage programs.
• "Very strong" link with the Kazakh government. The Kazakhstan government wholly owns MGFK through Samruk-Kazyna holding. Privatization of MGFK was being discussed, but was cancelled in late 2008. The government tightly monitors MGFK’s activities through Samruk-Kazyna. The holding company has just appointed a new board and is likely to finally set the updated strategy for MGFK in November-December 2009.

The ’B’ stand-alone credit profile reflects MGFK’s short track record, weak and volatile financial position, with losses reported, and limited scale of operations. As of July 1, 2009, MGFK had guaranteed mortgage loans worth about KZT50 billion (US$340 million). Mortgage insurance provided under the state-sponsored programs comprises about 90% of MGFK’s portfolio, and should remain at a similar level until 2010. The stand-alone rating also incorporates MGFK’s commitment to a policy of "no direct debt" and that so far, no calls have been made on its guarantees.

The outlook on MGFK is stable because the outlook on Kazakhstan is stable. S&P expects the government to continue to expand MGFK’s capital in the medium term. Furthermore, S&P does not expect any changes in the policy and regulatory framework that would challenge S&P expectations of a "moderately high" probability of support to MGFK from the government in case of financial distress.

"A negative rating action on Kazakhstan, or a change in our expectations of timely and sufficient extraordinary support to MGFK from the government because of weakening government support, could pressure the ratings," said Mr. Kopeykin.

The rating could also come under pressure should MGFK’s financial position and liquidity deteriorate compared with currently expected levels.

Ratings upside could result from a stronger sovereign credit profile, or a higher probability of extraordinary support.