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17.07.2008 - MDM Comment: NKNK and Kazanorgsintez

NKNK and KOS: aggressive investment plans of the two companies confirmed by TAIF
TAIF (NR) CEO Albert Shigabutdinov, gave an interview to Russian business daily Vedomosti today, the highlights of which are below.
- TAIF, a privately-owned Tatarstan-based investment holding that effectively controls NKNK (B1/NR/B+) and Kazanorgsintez (NR/B-/B-), plans to spend approximately USD12 bn on investments in the petrochemical sector over the next 8 years. This will include capex programs of USD3.5 bn and USD5 bn for KOS and NKNK, respectively (in fact, we had already heard similar numbers from TAIF last month, and commented on them in our note of June 11).
- NKNK and KOS will have to raise funding themselves, the exact sources of which are not clear from the interview, although an IPO for these two companies is not on the agenda. At the same time, NKNK’s new USD1 bn share issue in favor of existing shareholders, which was blocked by the regulator last year, is still being mulled over. With regard to KOS, Mr. Shigabutdinov highlighted the agreement reached in 2007 between Gazprom’s CEO and the president of Tatarstan Mintimer Shaymiyev. According to his comments, Mr. Miller and Mr. Shaymiyev agreed that Gazprom would acquire KOS and invest RUB60 bn in its capital. However, no formal documents have been yet signed with regard to this transaction, so the exact structure and timing of the deal are unclear. Mr. Shigabutdinov also failed to clarify how the ongoing disposal of Sibur by Gazprom will affect the agreed purchase, as Sibur was the party supposed to buy of KOS.
- TAIF doesn’t have any state-related shareholders and is valued at USD14 bn. The company’s shareholder structure is not disclosed, but management acknowledges that it owns minority stakes. TAIF’s public equity offering may take place, but not before 2011.
Our credit views with regard to NKNK and KOS remain unchanged. We continue to view an aggressive investment appetite as the key risk for both companies. In the case of KOS, intense spending in 2006-2007 resulted in the violation of a 4X Debt/EBITDA covenant in its Eurobond (a waiver for which has recently been received). NKNK capex has so far been more moderate, and funded from operating cash flow so that Debt/EBITDA, according to our estimates, has declined to around 2X in 2007 (IFRS was released earlier this week). We hope that if and when the gigantic plans announced by TAIF move into the implementation stage, they are not solely funded by debt. Still, the risks of increasing leverage are there. However, these risks are somewhat mitigated by a good pricing environment for petrochemical products and a strong equity appetite in the sector (M&A-related upside is particularly relevant for KOS).
For the reasons above, as well as due to our generally negative approach with regard to longer-dated bonds (new issuance supply will not let spreads to tighten), we don’t expect KZOSRU 11 (YTM 9.1%) and NKNK 15_10 (YTP 9.1%) Eurobond issues to outperform in the short-term.

21.07.2008 13:33
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